I will restrict myself here to discussing the four most original
and significant aspects of the law-study's analysis of conglomerate
mergers. The first is the law-study's explanation of how
conglomerate mergers that create a merged firm that faces one or more
conglomerate rivals, each of which operates in at least one market in
which each merger partner operates, will increase the profits that the
merged firm can realize by practicing contrived oligopolistic pricing
above the profits that the merger partners could have earned by doing
so; will increase the profits that the merged firm's rivals can
earn by practicing contrived oligopolistic pricing; will increase the
profits that the merged firm can earn by raising the retaliation
barriers to expansion faced by the rival conglomerates in question; will
increase the profits that the merged firm's relevant rival
conglomerates can earn by raising the retaliation barriers to expansion
faced by the merged firm above the profits they could have earned by
raising the retaliation barriers to expansion faced by the merger
partners; and will increase the profits that the merged firm can earn by
targeting the relevant conglomerate rivals for predation and vice versa.
Thus, the law-study shows that a conglomerate merger can increase the
ability of the merged firm to induce a rival conglomerate that operates
in at least one market of both merger partners not to undercut its
contrived oligopolistic prices by enabling it to engage in cross-market
retaliation and/or to reciprocate to such a conglomerate rival's
abstention from undercutting not only in the same market but
cross-markets (67) (as well as by creating a merged firm that inherits
the reputation for engaging in strategic conduct of the merger partner
that has the stronger such reputation).

Relatedly, the law-study explains that a conglomerate merger will
increase the profits that a conglomerate rival of the merged firm that
operates in at least one market in which each merger partner operates
can earn by practicing contrived oligopolistic pricing by enabling that
rival to retaliate against the merged firm's undercutting not only
within the market in which the merged firm had undercut its price(s) but
also across markets against the merged firm if it undercuts such a
rival's price(s) and to reciprocate to a merged firm that has
abstained from undercutting not only within the market in which the
merged firm has foregone that opportunity but also in a different market
in which both it and the merged firm are operating. The law-study also
explains that a conglomerate merger (1) can increase the profits that
the merged firm can make by increasing the retaliation barriers to
expansion faced by a rival that operates in at least one of each of the
merger partners' markets by enabling the merged firm to retaliate
across markets to that rival's QV investment and/or to reciprocate
across markets to such a rival's decision to forego making an
otherwise-profitable QV-investment expansion and (2) can increase the
profits that a rival of the merged firm that operates in at least one
market in which each merger partner operates can realize by erecting
retaliation barriers to the merged firm's expanding in the same
ways in which it can enable the merged firm to earn more profits by
confronting the relevant rivals with (higher) retaliation barriers.
Finally, a conglomerate merger that creates a conglomerate firm that
operates in one or more ARDEPPSes in which each merger partner operates
can also increase the profits the merged firm can realize by driving the
kind of rival in question out of a market in which it was operating by
enabling the merged firm to practice predatory pricing in two or more of
the markets in which it and its target are operating and vice versa.

Second, the law-study provides an analysis of the conditions under
which potential competition or a particular potential competitor will be
effective, which is relevant to the determination of whether
conglomerate mergers that eliminate a potential competitor will tend to
yield Sherman-Act-illicit profits and reduce competition on that
account. More specifically, the law-study demonstrates that a potential
competitor will be effective if (1) the entry-barred
expansion-preventing QV-investment quantity in the relevant ARDEPPS is
lower than the entry-preventing QV-investment quantity (if the relevant
[[[[GAMMA].sub.D] + R + S + L].sub.E] + [M or O] total where the
subscript E stands for the established firm that is the relevant
best-placed potential expander in the relevant ARDEPPS is higher than
the [[[[GAMMA].sub.D] + R + S + L].sub.N] total for the best-placed
potential entrant where the subscript N stands for the best-placed
potential entrant into in that ARDEPPS) and (2) the potential competitor
is either (A) uniquely-best-placed to enter the ARDEPPS in question or
(B) sufficiently-well-placed to enter that ARDEPPS (i) to make it
profitable for an established firm to make a limit QV investment (a QV
investment it would not otherwise have found profitable) to keep the
entrant out or (ii) to find entry profitable after all better-placed
potential competitors have entered and the established firms have made
all the limit QV investments they found profitable. (68) I should point
out that this analysis implies the incorrectness of both the assumption
that the three best-placed potential entrants will always be effective
and the assumption that no worse-than-third-placed potential entrant
will ever be effective (assumptions made in the U.S. DOJ's 1984
Conglomerate Merger Guidelines). In many situations, no potential
competitor will be effective, and in many situations, more than three
potential competitors will be effective.

Third, the law-study explains the effects that effective potential
competition will have on QV-investment competition and, derivatively, on
price competition in a relevant ARDEPPS and, concomitantly, the
Sherman-Act-illicit profits and losses to relevant buyers that a
conglomerate merger that eliminates an effective potential competitor
will generate on that account (ignoring any effects it has by generating
dynamic efficiencies). More specifically, the law-study argues that,
except in two or possibly three types of situations, effective potential
competitors will affect the competitive equilibrium by entering
themselves or leading established firms to make limit QV
investments--conclusions that imply that conglomerate mergers that
eliminate an effective potential competitor will yield the merger
partners Sherman-Act-illicit profits on that account by obviating their
making a limit QV investment (which would have been unprofitable but for
its deterring a rival entry) or by preventing an entry that would
otherwise have been executed and would have reduced the supernormal
profits their other QV investments in the relevant ARDEPPS yield while
harming Clayton-Act-relevant-buyers by precluding them from securing the
buyer surplus they would have obtained by purchasing the product or
distributive service the eliminated QV investment would have created as
well as the extra buyer surplus the eliminated QV investment would have
enabled them to obtain when purchasing the preexisting products in the
ARDEPPS by lowering the prices charged for them. (69)

The preceding conclusions reflect the law-study's
demonstration that, if one excludes situations in which the relevant
potential entrant is an established-firm buyer or seller that is
considering vertically integrating backward or forward into the
potential limit pricer's ARDEPPS, effective potential competitors
will induce established firms to engage in limit pricing in only two
types of situations, each of which rarely arises--viz., (1) when the
potential limit pricer is a relatively-inefficient producer in a product
niche that (A) fears that--if the actual profit-potential of its niche
becomes known--it will be replaced by a more efficient newcomer and (B)
cannot sell its knowledge of the potential of its business to a buyer
that could do more with that knowledge or (2) when the potential limit
pricer fears that--if the existence of one or more profitable
QV-investment opportunities becomes known--potential investors will
overinvest and raise total QV investment above its equilibrium quantity.

The fourth and final part of the law-study's analysis of
conglomerate mergers that I will discuss at this juncture is its
critique of the so-called "toe-hold merger" doctrine that
several U.S. courts have used to analyze the legality of
geographic-diversification conglomerate mergers. (70) Assume that a firm
that wants to engage in geographic diversification (call it K for
conglomerate or prospective conglomerate) merges with or proposes a
merger with an established firm (E) that sells the same type of product
K sells but operates in a geographic market in which K does not
currently operate. According to the "toe-hold merger"
doctrine, for such a merger to be deemed lawful under the Clayton Act, K
must demonstrate both (1) that it would not enter E's market
independently if it were prohibited from merging with or acquiring an
established firm in that market and (2) either (A) that the E in
question was a relatively small firm in its market (was an [E.sub.s]) or
(B) if the E was relatively large firm ([E.sub.L]), the K had made
reasonable, unsuccessful efforts to identify an [E.sub.s] firm that it
could profit from acquiring or merging with if the alternative were
engaging in no merger or acquisition in the [E.sub.s]'s market at
all.

The law-study criticizes the "toe-hold merger" doctrine
on four grounds. First, it questions the doctrine's assumption
that, across all cases, the less-profitable but still-profitable
K-[E.sub.s] merger the doctrine would require Ks to execute would yield
Clayton-Act-relevant-buyers larger net dollar gains than would the more
profitable K-[E.sub.L] merger the doctrine would require Ks to reject.
It explains that, for this assumption to be true, two conditions must be
fulfilled: (1) the positive difference between the profits that the
K-[E.sub.L] and K-[E.sub.s] mergers would yield must be bigger than the
positive difference between the equivalent-dollar benefits the
K-[E.sub.L] and K-[E.sub.s] mergers would respectively confer on
Clayton-Act-relevant-buyers (taking account of the fact that in some
instances the K-[E.sub.s] merger may benefit relevant consumers more
than the K-[E.sub.L] mergers would)--i.e., from the perspective of the
goal of benefiting Clayton-Act-relevant-buyers, there must be a bias in
favor of K-[E.sub.L] mergers relative to K-[E.sub.s] mergers--and (2)
this bias must be sufficiently large relative to the differences in the
profits yielded respectively by K-[E.sub.L] and K-[E.sub.s] mergers to
make the K-[E.sub.L] mergers as a class less beneficial to relevant
consumers than the more-profitable K-[E.sub.s] mergers would be. The
law-study then explains why there is little reason to believe that, from
the perspective of benefiting Clayton-Act-relevant-buyers, there is any
bias in favor of K-[E.sub.L] mergers over K-[E.sub.s] mergers, much less
a requisitely-large bias in favor of K-[E.sub.L] mergers. Thus, the
law-study shows that--in relation to the profits that K-E mergers will
generate for the merger partners because the K can take better advantage
of the E's tax losses than the E firm could and because the owner
of the E wants to retire and liquidate his or her assets, there is
probably a relevant bias in favor of K-[E.sub.s] mergers over
K-[E.sub.L] mergers. The law-study also explains that--in relation to
the profits that a K-E merger will generate for the K firm when the K
firm is able to purchase the E firm at a distress price as a result of
its threatening to target it for predation--there is also likely to be a
bias in favor of the K-[E.sub.s] merger over the K-[E.sub.L] merger. The
law-study goes on the indicate that whether--in relation to the profits
the K-E merger will generate for the merger partners by yielding static
efficiencies--there is a bias in favor of K-[E.sub.L] mergers over K-Es
mergers is unclear: the direction of any such bias depends on whether
[E.sub.L] firms or Es firms have a higher ratio of best-placed to
second-placed or close-to-second-placed positions. These arguments and
others like them strongly favor the conclusion that it is extremely
unlikely that, across all cases, there will be a bias much less a
critical bias in favor of K-[E.sub.L] mergers over K-[E.sub.s] mergers.

Second, the law-study criticizes the "toe-hold merger"
doctrine by questioning its implicit assumptions (1) that it will not be
"cost-effective" to analyze on a case-by-case basis whether
there is a critical bias in favor of K-[E.sub.L] mergers and (2) that it
is legitimate for courts not to execute case-by-case analyses when in
some sense it would not be cost-effective for them to do so.

Third, the law-study criticizes the "toe-hold merger"
doctrine by pointing out that even if, as a class or in individual
cases, the K-[E.sub.s] mergers would benefit consumers more than would
the K-[E.sub.L] mergers for which they could be substituted, the
doctrine might harm consumers by deterring Ks from investigating the
possibility of entering the E market by merger or acquisition by
reducing the profitability of the relevant research by increasing its
cost and reducing the profitability of the merger that is executed
(search-costs aside).

Fourth, the law-study criticizes the "toe-hold merger"
doctrine because it implicitly rejects the do-nothing baseline for
competitive-impact assessment that I think is part of U.S. antitrust
law. Thus, the doctrine will lead to the prohibition of some
geographic-diversification K-[E.sub.L] conglomerate mergers despite the
fact that they would not lessen competition (indeed, despite the fact
that they would increase competition) relative to the do-nothing
alternative in the (unjustified and probably incorrect) belief that such
mergers would benefit relevant consumers less than would a K-[E.sub.s]
merger that would be more profitable for the K firm than doing nothing.

5. Pricing Techniques, Contract-Clause and Sales-Policy Surrogates
for the Hierarchical Controls That Vertically-Integrated Firms Can Use
to Induce Their Managers and Staff to Act in the Firm's Interest,
and Vertical Mergers and Acquisitions

A firm can engage in a wide variety of vertical practices: it (1)
can use various pricing techniques, (2) can subsidize its independent
distributors' advertising expenditures, in-store trade-promotion
displays, and shelf-placement (slotting) decisions, (3) can enter into
tying or reciprocity agreements and maximum and minimum
resale-price-maintenance agreements, (4) can contractually impose
vertical territorial restraints and vertical-customer-allocation
restrictions on its independent distributors, (5) can establish
single-brand exclusive dealerships and enter into long-term
full-requirements contracts and long-term total-output-supply contracts,
(6) can inform its dependent distributors that it has adopted a sales
policy of discontinuing its supply of any independent distributor that
does not conform to one or more of its expressed wishes, and (7) can
vertically integrate through merger, acquisition, joint venture, or
internal growth. The Sherman Act covers all these species of vertical
conduct; the Clayton Act covers (1) price discrimination as it
idiosyncratically defines the practice (in Section 2), (2)
full-requirements and total-output-supply contracts or contractual
clauses and single-brand exclusive dealerships (in Section 3), and (3)
(since 1950) vertical mergers and acquisitions (in Section 7). I believe
that--with one possible exception--Article 101 covers all these variants
of vertical conduct either as agreements among undertakings or (in the
case of successful sales-policies) as concerted practices: the possible
exception is unsuccessful sales-policies (sales policies that do not
succeed in inducing any independent distributor to conform to the
manufacturer's wishes). Article 102 covers all these categories of
vertical practices when perpetrated by a dominant firm or the members of
a set of collectively-dominant rivals. The EMCR covers vertical mergers
and acquisitions and full-function vertical joint ventures.

The law-study's analyses of vertical conduct would constitute
a substantial book by itself: they occupy 280 pages of Volume II. (71)
Obviously, I cannot summarize most of these analyses here. Instead, I
will focus on the elements of the law-study's relevant analyses
that I think are original and/or important and underemphasized in the
literature.

The first law-study point about vertical conduct I want to recount
is that the specific-anticompetitive-intent test of illegality and the
lessening-competition test of illegality are properly applied to
different "units of vertical conduct." Thus, although (not
surprisingly) the specific-anticompetitive-intent test of illegality is
properly applied (1) to an individual actor's pricing-technique or
sales-policy choices, (2) to one or more vertical agreements into which
an individual actor enters with independent distributors or suppliers,
(3) in the rare instance in which two or more rivals agree to enter into
parallel vertical agreements, to the agreement they made, and (4) to an
individual vertical merger, acquisition, or joint venture, the
lessening-competition test is properly applied to a rule allowing all
members of a set of rivals to engage in a covered category of vertical
conduct. The latter conclusion is a corollary of the level-playing-field
norm of U.S. antitrust law and E.U. competition law. A decision-rule
that focused on the competitive impact of an individual firm's
vertical conduct would violate that norm because, unless the
lessening-competition test were supplemented with a
natural-monopoly-type organizational-allocative-efficiency defense that
eligible defendants could establish at requisitely-low cost, an
individual-firm's-conduct-focused decision-rule would result in the
courts' adopting a pari-mutuel approach in which well-established
firms would be precluded from engaging in vertical practices that
increased their businesses' organizational allocative
efficiency/proficiency when the conduct would on this account be
requisitely likely to induce a marginal firm to exit by worsening its
array of competitive positions or to deter a potential competitor from
entering by worsening its array of prospective competitive positions
while marginal and potential competitors would be allowed to engage in
the exact same vertical practice because their doing so would
respectively help them survive and encourage them to enter by improving
respectively their actual and prospective competitive-position arrays by
increasing their organizations' allocative and presumptively
private proficiency. (72)

The second vertical-conduct-related law-study point I want to
recount is the only original point the law-study makes about the
single-product-pricing techniques a firm can use. The law-study explains
the private benefits and costs to a seller of lowering the lump-sum fee
and increasing the per-unit price it charges a given buyer above the
marginal cost of producing the unit of output whose production would
bring the seller's total unit-sales to that buyer to the
transaction-surplus-maximizing quantity, the quantity that would
maximize the joint gains of the relevant seller and buyer--the quantity
at which the buyer's demand curve for the relevant product cuts the
seller's marginal cost curve from above. As the law-study shows,
such a pricing-move will benefit the seller by reducing the losses it
sustains because of its pessimism about the relevant buyer's
quantity demand for its product, because of the buyer's pessimism
about the buyer's quantity demand for the seller's relevant
product, and because of the risk of buyer arbitrage and may also benefit
the seller by reducing the sum of the risk costs the relevant
transaction imposes on it and the buyer by shifting to the seller some
of the risk that the buyer's quantity demand will be lower than
both the seller and the buyer expect when the seller is less risk-averse
than the buyer and/or when the pricing-move increases the seller's
risk by more that it decreases the buyer's risk--say, because the
seller produces an input that the buyer uses to produce a final product
or the seller produces a final product that the buyer distributes and
the seller is concerned only about variations in the total sales of all
its customers while the individual buyers are concerned not only about
variations in such total sales but also about variations in their shares
of those sales. The law-study also explains that such a pricing-move
will impose losses on the seller by reducing its unit-sales and hence
the joint gain its transactions with the relevant buyer generate and by
deterring the buyer from making jointly-profitable demand-increasing
expenditures and slotting decisions by creating a situation in which the
seller obtains some or more of the joint profits such expenditures yield
it and the buyer (though this effect can be reduced by appropriate
buyer-expenditure-subsidization policies). (73)

The third point the law-study makes about vertical conduct that I
want to recount here may not be original but is often overlooked or, at
least, underemphasized: to the extent that a manufacturer charges its
distributors a per-unit price for its product that exceeds the marginal
cost the manufacturer must incur to supply the distributor with the good
in question, it will tend to deter the distributor from making
demand-increasing expenditures or slotting decisions that are in the
distributor's and manufacturer's joint interest (in addition
to causing the distributor to charge a resale price for the
manufacturer's good that is higher than the resale price that would
be in the distributor's and manufacturer's joint interest).
Manufacturers can combat the former tendency of its supra-marginal-cost
per-unit pricing by subsidizing its independent distributors'
demand-increasing expenditures, by creating single-brand exclusive
dealerships, by using so-called full-line-forcing tie-ins to shift the
locus of its supra-marginal-cost pricing to a less-differentiated
product for which the tendency of such pricing to deter
demand-increasing expenditures is less consequential, and by obligating
its independent distributors to give it jointly-optimal shelf-space.
(74)

The fourth set of original points the law-study makes about
vertical conduct contains five points that relate to tie-ins and
reciprocity. The first of these is the law-study's recognition that
meter pricing is a variant of the mixed pricing-technique in which a
lump-sum fee is combined with a supra-marginal-cost per-unit price. (75)
This recognition is important inter alia because it makes clear that the
profitability of meter pricing will often not depend on its generating
discriminatory prices.

The law-study's second original tie-in/reciprocity-related
point relates to so-called full-line-forcing tie-ins, in which a seller
lowers the per-unit price it charges a buyer Y for a product A the
seller X produces below the per-unit price X would find most profitable
to charge Y for A in a separate transaction on A (charges the buyer a
lump-sum fee plus a per-unit price on A that would yield the buyer
unnecessary buyer surplus if nothing more were required of the buyer) on
condition that the buyer agree to purchase its full requirements of a
second product B (that the seller may or may not produce itself) for a
higher per-unit price than the buyer would otherwise have to pay for
that second product B. The law-study explains that such tie-ins will
tend to be profitable if (1) the ratio of the decrease in seller surplus
generated by the price-reduction on A to the increase in buyer surplus
generated by that price-reduction is lower than the ratio of the
increase in seller surplus generated by the increase in the price of B
under the full-requirements contract to the decrease in buyer surplus
generated by the increase in the price of B (a condition that will be
more likely to be satisfied if the transaction-surplus-maximizing output
of B under the full-requirements contract exceeds the
transaction-surplus-maximizing output of A, if the slope of the
full-requirements demand curve for B over the relevant output-range
exceeds the slope of the demand curve for A over the relevant
output-range, and if the slope of the marginal cost curve for B over the
relevant output-range is gentler than the slope of the marginal cost
curve for A over the relevant output-range) and (2) the reduction in
A's price will increase the joint profits that the seller and buyer
obtain respectively by producing and distributing A more by encouraging
the buyer involved in the sale to advertise and promote A than the
increase in B's price will decrease the joint profits that the
seller and buyer obtain respectively by supplying and distributing B by
discouraging the buyer involved in the tie-in from advertising and
promoting B (a relationship that is likely to obtain when product A is
more differentiated than product B). (76)

The law-study's third tie-in/reciprocity-related point is that
(1) tie-ins in which a producer of an input A against which substitution
is possible ties its sale of that input to the buyer's agreeing to
purchase its full requirements of the input B that could be substituted
for the seller's input (and equates the ratio of the price of A to
the marginal cost of A to the input seller with the ratio of the price
of B under the tie-in to B's market price) or of another input
against which substitution is not possible can increase the tying
seller's profits by preventing its supra-marginal-cost per-unit
pricing from inducing its customer to make jointly-unprofitable
substitutions against the seller's input and that (2)
end-product-royalty schemes and contractual clauses that obligate the
input-buyer to sell the input supplier the input-buyer's total
output of its final product for a lower price than the input-buyer would
otherwise charge for that final product can perform the same function
for producers of inputs against which substitution is possible. (77)

The law-study's fourth and partly-related
tie-in/reciprocity-related point is that reciprocity agreements can
perform all the Sherman-Act-licit functions that tie-ins can perform
(though reciprocity agreements will be somewhat less likely to perform
some of these functions than are tie-ins). (78)

The law-study's fifth tie-in/reciprocity-related point that I
want to discuss here is really a pair of points that the law-study makes
about the leverage theory of tie-ins and reciprocity to which U.S.
courts historically subscribed and still appear to subscribe and to
which the EC and E.U. courts have always subscribed--the theory that the
only function or at least an inevitable function of tie-ins that are
employed by sellers that have monopoly power in the so-called
tying-product market and of reciprocity that is practiced by a firm that
has monopsony power in the market in which it acts as a buyer is to use
that power to leverage itself into a position of monopoly power in the
so-called tied-product market (in the case of reciprocity, in the market
in which the relevant actor functions as a seller). The law-study
explains that there is a generation gap in this "theory": if
the seller with monopoly power or the buyer with monopsony power has
taken full advantage of that power when pricing the
"monopolized" good or setting the price it pays for the
monopsonized good, no power will be left for it to use when selling the
tied-product. (79) The law-study also argues that the recent attempt of
some economists to revivify the leverage theory by basing it on the fact
that an infinitesimally-small reduction in the price that a seller
charges can yield buyers some gains without costing the seller anything
fails because sellers cannot in practice make infinitesimally-small
changes in their prices. (80)

The sixth set of the law-study's vertical-conduct-focused
points I want to recount contains three points that relate to
resale-price-maintenance agreements, vertical territorial restraints,
and vertical customer-allocation clauses. The first point in this set is
that the U.S. courts and the EC and the E.U. courts are incorrect in
claiming that the antitrust laws they are respectively charged with
interpreting and applying disfavor reductions in intra-brand competition
as much as they disfavor reductions in interbrand competition. The U.S.
statutes contain no text that supports this conclusion. Admittedly, the
texts of Article 101(1) and Article 102 do contain text that favors this
claim--clause (e) in Article 101(1) lists as an example of covered
conduct that has the object or effect of preventing, restricting, or
distorting competition clauses in contracts that "make the
conclusion of contracts subject to the acceptance by other parties of
supplementary obligations, which by their nature or according to
commercial usage have no connection with the subject of such
contracts," and clause (d) in Article 102 lists as an abuse of a
dominant position precisely the same clauses in contracts. However,
these Treaty provisions clearly reflect the failure of the drafters and
ratifiers of the original 1957 treaty (the Treaty of Rome) in which they
first appear (81) to understand the Sherman-Act-licit functions that
resale price maintenance, vertical territorial restraints, and vertical
customer-allocation clauses (and, for that matter, tie-ins and
reciprocity agreements) perform: these practices and the Article 101(1)
clause-(e)referenced and Article 102 clause-(d)-referenced contract
clauses that effectuate them are intimately connected to the proper
functioning of the contracts that include them and would on that account
be a standard part of commercial practice if not prohibited by law.
Given these facts and the reality that the relevant treaty-provisions do
not condemn these practices directly but condemn them respectively only
when they prevent, restrict, or distort competition or constitute an
abuse of a dominant position, no textual argument can be made to support
the conclusion that the practices in question are illegal under E.U.
competition law. Nor can their prohibition be justified in "policy
terms." As the law-study shows, all these practices perform a wide
variety of Sherman-Act-licit functions, (82) the argument made in both
the U.S. and the E.U. that prohibiting these vertical practices can be
justified by arguing that doing so protects the liberty interests of
independent distributors cannot bear scrutiny, (83) and prohibitions of
these practices seem unlikely to secure the Treaty goal of promoting
trade among E.U. member-states by increasing "parallel trade"
because manufacturers that are forbidden to prohibit independent
distributors in one country in which they want to charge lower prices
(say, because the country is poorer) from reselling the good to
distributors in another country in which the manufacturer wants to
charge higher prices (because it is richer) are likely to respond by
vertically integrating forward into distribution, by ceasing to
discriminate in the poorer country's favor, or by ceasing to sell
their products in the poorer country altogether. (84)

The second point or set of points that the law-study makes about
resale price maintenance, vertical territorial restraints, and
vertical-customer-allocation clauses is that both the U.S. and the E.U.
authorities' treatment of these practices has improved. In the
U.S., resale price maintenance, which used to be per se illegal, is now
to be assessed through a rule-of-reason analysis in which an exemplar is
illegal only if it reduces intrabrand competition by more than it
increases interbrand competition (85) (a better decision-rule that is
still misguided, though it does not seem to have prevented the lower
courts that are obligated to apply it from reaching in virtually all
cases what is in fact the correct legal conclusion that the practices to
which it applies are lawful). In the U.S., the legality of vertical
territorial restraints (which were never per se illegal because they did
not involve "price-fixing"--an ignorant distinction that
reflected the courts' failure [1] to recognize that vertical
territorial restraints and vertical price-fixes perform the same
Sherman-Act-licit functions and [2] to distinguish between horizontal
price-fixing and vertical price-fixing) depends on the same trade-off,
but lower courts have overwhelming found for defendants in such cases.
(86) The U.S. DOJ and FTC have stopped attacking these practices
altogether. Starting in 1997, the EC responded to criticisms that both
European academics and the E.U. courts made of its handling of these
practices by changing its block-exemption regulations (BERs) on them in
ways that take at least some account of the legitimate economic
functions that these practices can perform. However, as the law-study
shows, the EC's treatment of these practices (and, for that matter,
the E.U. courts' treatment of them) continues to manifest at best a
patchy understanding of their actual functions and a tendency to
micromanage behavior that the relevant officials understand only
imperfectly. (87)

The sixth set of the law-study's vertical-conduct-related
points I want to discuss contains three points or sets of points about
the Sherman-Act-illicit functions that various vertical practices can
perform even if they do not "foreclose competition." The first
such point is that the law-study reiterates the standard conclusions
that the following categories of vertical conduct violates the
specific-anticompetitive-intent test of illegality: (1) package-pricing
tie-ins whose profitability is critically affected by their concealing
predatory pricing and/or retaliatory pricing that violates antitrust
law, (2) the tiny number of resale-price-maintenance agreements that are
designed to facilitate the resellers' horizontal price-fix by
enlisting their suppliers as enforcers of that price-fix, (3) the tiny
number of resale-price-maintenance agreements that are designed to deter
violations of manufacturer horizontal price-fixes by reducing the
profits that individual price-fixers can earn by cutting their prices
(by cheating their fellow cartel-members) by militating against the
cheating's increasing the cheater's sales by deterring the
cheater's independent distributors from passing on any of the
price-cuts, and (4) the tiny number of vertical territorial restraints
and customer-allocation clauses that are part of a broader horizontal
market-division arrangement in which each manufacturer restricts its
distributors (and hence itself) to competing for the patronage of a
subset of the relevant potential buyers that (ideally) does not overlap
with the subset of such buyers to which any other participant in the
network restricts itself. The second point, which is not standard, is
that tie-ins, reciprocity agreements, resale-price-maintenance
agreements, vertical territorial restraints, and
vertical-customer-allocation clauses will violate the
specific-anticompetitive-intent test of illegality if (1) they increase
the perpetrator's profits by driving out a rival or deterring a
rival QV investment by increasing the demand curve for the
perpetrator's product, thereby reducing the actual/prospective
demand curves for the exiting/deterred rival/potential rival's
products, thereby critically reducing the profits that the exiting rival
can earn by staying in the business and/or the profits that the deterred
potential investor could earn on any investment it introduced into the
perpetrator's ARDEPPS and (2) the perpetrator would not have found
the relevant exemplar of the practice in question profitable ex ante but
for its belief that the practice would or might have this series of
effects. The third point in this set is that only a tiny number of the
exemplars of any of the practices in question is likely to violate the
specific-anticompetitive-intent test of illegality for this reason and
that it will be exceedingly difficult to establish the illegality of any
exemplar that actually does violate that test for this reason: even if
one can prove that the practice increased the practitioner's
profits by causing one or more of its rivals to exit or deterring a
rival QV investment, it will be extremely difficult to establish the
requisite probability that the practitioner's ex ante belief that
the practice would be profitable was critically affected by the prospect
of its doing so (given the fact that the practice would also generate
Sherman-Act-licit profits).

The sixth set of the law-study's vertical-conduct-focused
points that I want to recount at this juncture is a set of points that
relates to the concern that standard long-term full-requirements
contracts, long-term single-brand exclusive-dealership contracts (which
actually are a variant of long-term full-requirements contracts),
long-term total-output-supply contracts, and vertical integration
(whether by merger, acquisition, joint venture, or internal growth) may
yield Sherman-Act-illicit profits and lessen competition by
"foreclosing competition."

The first foreclosure-related law-study point is a corollary of the
first set of law-study vertical-conduct-focused points this article
discusses: the unit of conduct whose "foreclosing" effects is
of legal concern varies with the test of illegality that is being
applied. When the relevant analysis seeks to assess the legality of
conduct under a specific-anticompetitive-intent test of illegality, the
relevant unit for foreclosure analysis is an individual firm's
engaging in the conduct in question or the conduct of any set of rivals
that have agreed to engage in the conduct. When the relevant analysis
seeks to assess the legality of conduct under a lessening-competition
test of illegality, the relevant unit for foreclosure-analysis is a rule
allowing all members of a set of rivals to engage in the conduct in
question.

The second foreclosure-related set of points the law-study makes
explains the legal relevance of the foreclosure possibility: the fact
that conduct forecloses competitors is relevant in
specific-anticompetitive-intent cases because the conduct that produces
this effect will on that account tend to generate Sherman-Act-illicit
profits by causing one or more rivals of the perpetrator to exit or by
deterring one or more of the perpetrator's active or potential
competitors from making a QV investment in the relevant area of
product-space by preventing one or more actual or potential
distributor-rivals of a vertically-integrated manufacturer-distributor
perpetrator from buying a product its manufacturing division produces or
one or more actual or potential final-good-manufacturer-rivals of a
vertically-integrated input/final-good-manufacturing perpetrator from
buying an input from the input-manufacturing division of the
perpetrator; the fact that two or more rivals' conduct forecloses
competition is relevant in lessening-competition cases because it raises
the possibility that the conduct will inflict a net equivalent-monetary
loss on Clayton-Act-relevant-buyers by causing one or more of the
perpetrators' rivals to exit or deterring one or more of the
perpetrators' actual or potential competitors from making a QV
investment in the relevant area of product-space by preventing one or
more actual or potential distributor-rivals of the perpetrators from
buying the vertically-integrated manufacturer/distributor
perpetrators' products or one or more actual or potential
final-good manufacturer rivals of vertically-integrated
input/final-good-manufacturing perpetrators from buying inputs from the
perpetrators.

The third "foreclosure"-related point the law-study makes
relates to the fact that the inherently-profitable decisions of a
vertically-integrated individual firm or of two or more members of a set
of vertically-integrated rivals not to deal with one or more competitors
or to charge those competitors higher prices for the perpetrator's
or perpetrators' product than the shadow prices that the relevant
vertically-integrated perpetrators "charge" the divisions of
their companies that compete with the disadvantaged rival(s) may well
put the disadvantaged rival(s) at a competitive disadvantage that has no
connection to how allocatively-well-placed the disadvantaged rival(s) is
(are) to supply relevant buyers. The law-study points out that, if in
these circumstances the relevant decisions are said to
"foreclose" the disadvantaged rivals even if they do not
induce a disadvantaged rival to exit or deter a disadvantaged rival from
investing (if the concept of foreclosure is defined to cover cases in
which disadvantaged rivals may not be induced to exit or deterred from
investing), the fact that conduct "forecloses competitors" in
this expanded sense will be relevant to its legality under the
"distorting competition" test of illegality promulgated by
Article 101(1); and if the relevant perpetrator is a dominant firm or
the relevant perpetrators are members of a set of rivals that are
collectively dominant, the fact that its or their conduct forecloses
competition in this expanded sense will be relevant to its legality
under Article 102's "exploitative abuse of a dominant
position" test of illegality to the extent that it increases the
probability that the perpetrator or perpetrators are obtaining an
exploitatively-higher percentage of the transaction surplus their sales
to their customers generate.

The fourth set of foreclosure-focused points the law-study makes
relates to the way in which foreclosure disadvantages the foreclosed
competitors. The standard account focuses on foreclosure's
precluding a foreclosed manufacturer from obtaining the quantity of
inputs it needs or the quantity of sales to distributors it requires to
realize a normal rate-of-return on its investment or precluding a
foreclosed distributor from obtaining the quantity of final goods it
needs to buy (to "resell") to realize a normal rate-of-return
on its investment. The law-study notes that this account ignores the
facts that not all varieties of a required input will be equally
satisfactory to a manufacturer, that not all potential customers will be
equally valuable to a manufacturer, and that not all varieties of final
goods will be equally valuable to a distributor. The law-study also
offers an alternative (and, I believe, superior) account of the way in
which foreclosure disadvantages the "foreclosed"
competitor--viz., by depriving it of the profits it would have made on
the purchases or sales the conduct in question precludes it from making.

The fifth set of foreclosure-focused points the law-study makes
relates to the "character" of the foreclosure's or
foreclosures' foreclosing decisions. The law-study indicates that
some such decisions are predatory--are decisions to reject
inherently-profitable deals that would have been economically efficient
in an otherwise-Pareto-perfect economy in order to reduce the absolute
attractiveness of the offers against which the forecloser will have to
compete by driving the foreclosed rival out or by deterring a
prospective "foreclosee" from making a rival QV investment.
The law-study also points out that many foreclosing decisions are not
predatory--are inherently profitable. Thus, as the law-study argues,
(88) many long-term single-brand exclusive dealerships, (89) long-term
full-requirements contracts, (90) and long-term total-output-supply
contracts (91) that foreclose competitors perform Sherman-Act-licit
functions whose prospective performance would suffice to lead their
perpetrator to conclude ex ante that the relevant conduct would be
profitable. The law-study also explains why it will usually be
inherently profitable for a vertically-integrated firm to charge
independent customers per-unit prices that exceed the marginal cost the
integrated firm must incur to supply them while instructing its
downmarket divisions to base their decisions on the assumption that the
cost to them of the inputs/final products the firm's upstream
division supplies them equals their marginal cost to the upstream
division (92) and why most vertical mergers that create firms that
disadvantage independents in this way do not violate the
specific-anticompetitive-intent test of illegality. (93)

The sixth set of law-study foreclosure-related points I want to
reference here relates to the moves that a foreclosed competitor can
make to reduce or eliminate the loss that the "foreclosing"
conduct would otherwise impose on it: (1) vertically integrating
backward or forward itself through internal growth (an option that will
be more cost-effective if ARDEPPS demand is increasing through time and
the firm faces low [[[PI].sub.D] + R] barriers to entering the relevant
ARDEPPS), (2) vertically integrating backward or forward through a joint
venture (that faces lower [[[PI].sub.D] + R] banders than it would face
on its own), (3) inducing an independent firm to enter the ARDEPPS in
which the foreclosing conduct was taking place (by identifying that firm
and explaining to it why its entry would be profitable and/or by
increasing the profits the independent could earn by entering by
offering to enter into a long-term supply-contract with it or by
directly subsidizing its entry), or (4) participating in a vertical
merger or acquisition. (94)

The seventh law-study foreclosure-focused point I want to repeat
here relates to the following question: If buyers are collectively
disadvantaged by one or more sellers' inducing enough of them to
lock themselves into long-term full-requirements contracts to drive a
rival out or to render unprofitable what would otherwise have been a
profitable (and buyer-benefiting) entry (or established-rival
QV-investment expansion), why do enough buyers agree to lock themselves
in to generate this outcome? The answer is that the buyers are
"tyrannized by their small decisions" (an expression I am
borrowing from my first economics teacher, Fred Kahn): each individual
buyer's refusal to lock itself in supplies a collective good to all
buyers and, if no individual buyer's refusal to lock itself in will
critically affect whether enough buyers are unbound to make entry
profitable either directly or by leading enough other buyers to join it,
it will not be in any individual buyer's interest to forgo even the
tiniest compensation (say, the receipt of the proverbial peppercorn) to
lock itself in, and the relevant seller or sellers will therefore be
able to profit by locking enough buyers in to foreclose the continued
operation of an established rival or a QV investment by a rival. (95)

The eighth and final set of law-study points on foreclosure I want
to recount relates to the U.S. and E.U. case-law on foreclosure. I start
with three of the points the law-study makes about the U.S. case-law on
foreclosure. First, the law-study argues that both the
quantitative-substantiality test that the Supreme Court originally
promulgated for determining the legality of long-term single-brand
exclusive dealerships under the (Clayton Act's)
lessening-competition test (96) and the qualitative-substantiality test
that the Supreme Court then substituted for the
quantitative-substantiality test in a Clayton Act long-term
full-requirements contract case (97) cannot bear scrutiny: neither
focuses (1) on whether enough suppliers/distributors are left free to
allow marginal established firms to survive or potential QV investors
that would otherwise have found it profitable to add to the relevant
ARDEPPS' QV-investment quantity to profit by doing so, (2) on
whether the locked-in firms were particularly-well-placed to supply the
firm(s) whose competition might have been foreclosed or vice versa, or
(3) on whether the possibly-foreclosed rival could critically reduce or
eliminate the loss the relevant conduct would otherwise have imposed on
it by vertically integrating itself through internal growth, merger,
acquisition, or joint venture or by inducing an independent firm to
enter the ARDEPPS in which the conduct alleged to be foreclosing took
place or was expected to take place.

Second, the law-study points out (98) that the "essential
facilities" doctrine (created by the Supreme Court, though the
Court denies having even endorsed it, and applied by several lower
courts either explicitly or implicitly) is incorrect as a matter of U.S.
law. The "essential facilities" doctrine (which, in fact, has
never been well-defined) states that, in some circumstances, at least
some types of firms, joint ventures, or participants in other sorts of
collaborative arrangements that own a facility that on some relevant
definition is "essential" have a legal obligation to make that
facility available on "reasonable" terms to others for which
usage of that facility is deemed to be essential in the relevant sense.
The law-study argues that this doctrine is wrong as a matter of U.S. law
if it requires the owners of the essential facility to allow others to
use it on "reasonable" terms when their refusal to supply
access to it on such terms was not predatory because U.S. antitrust law
does not require actors that have obtained competitive advantages
legitimately to share any associated transaction surplus with their
customers.

Third, the law-study summarizes the position that the U.S. courts
have taken in various time periods on the likelihood that vertical
mergers would violate the Shennan Act or (post-1950, when the
Celler-Kefauver Act amended the Clayton Act to make it cover vertical
mergers and acquisitions) the Clayton Act. (99) More specifically, the
law-study explains that (1) prior to 1950, U.S. courts assumed that many
if not most vertical mergers were designed to and successfully did
lessen competition by foreclosing one or more competitors of the merger
partners, (2) between 1950 and 1970, U.S. courts--possibly under the
influence of leading economists who believed that vertical integration
reduces competition by foreclosing competitors (100)--were even more
hostile to vertical mergers and acquisitions than their predecessors had
been, (3) in the 1970s, the Supreme Court justified its condemnation of
a vertical merger in the last such case it has heard (101) with an
argument that is a "cousin" of the foreclosure argument--viz.,
the argument that the acquisition under scrutiny would lessen
competition by raising barriers to entry--and the lower courts also
manifested their hostility to vertical mergers in opinions that
(collectively) held that, although foreclosures of 5-6% were acceptable,
foreclosures of 15% or higher justified the conclusion that the vertical
mergers that generated them violated the Clayton Act's lessening
competition test of illegality, but (4) by the late 1980s (perhaps under
the influence of the Chicago School), federal courts had come to the
conclusion that vertical mergers and acquisitions reduce competition
only rarely. (The law-study also points out that [1] although the DOJ
and FTC were historically as hostile to vertical mergers as the U.S.
courts were, starting in about 1970, they became much more friendly
toward them, [2] although the DOJ's 1984 Vertical Merger Guidelines
(102) contain a lot of statements that cannot bear scrutiny, they are
not particularly hostile to vertical mergers, and [3] since 1984, the
DOJ has devoted few resources to investigating or challenging vertical
mergers [though the FTC has paid somewhat more attention to them]).

I will now recount three of the points the law-study makes about
the EC's and E.C./E.U. courts' positions on foreclosure.
First, the law-study states that, in the early 1990s, the EC seemed to
be using something akin to the U.S. "quantitative
sustainability" test to assess the legality of
allegedly-foreclosing conduct (103) while the European Court of Justice
(ECJ) seemed to be using something akin to the U.S. "qualitative
sustainability" test of illegality to assess the legality of
allegedly-foreclosing conduct. (104) Second, the law-study points out
that, more recently, the EC has "evinced a greater awareness than
their U.S. counterparts have done of the fact that the foreclosing
effect of any arrangement that locks in a potential customer or supplier
of an established rival of the perpetrators) or of a rival potential
investor in the area of product-space in which the perpetrator(s) is
(are) operating depends not on the relationship between the quantity of
purchases or sales that the possibly foreclosed rival must make to be
able to survive or break even and the quantity of sales or supplies in
the relevant area of product-space that are not locked in but on the
relationship between the fonner of the above two quantities and the
quantity of not-locked-in sales that a particular foreclosee was or
would be well-placed to make or the quantity of not-locked-in suppliers
whose supply to the relevant foreclosee (given the products'
attributes and the locations of different suppliers) would have been
most advantageous to it." (105) Third, the law-study also points
out that the EC's statements on the foreclosure issue are sometimes
inconsistent, sometimes incomplete, and sometimes mysterious and
probably wrong. Thus, the law-study points out that the EC's
statement that vertical mergers that create an entity that has market
shares below 30% in markets whose postmerger HHI is below 2000 are
"unlikely" to be "of concern" ignores not only the
inevitable arbitrariness of market definitions but the related fact that
some pairs of firms in any defined market will be far more rivalrous
than are other pairs of firms in that market; the EC's recognition
that foreclosure might be prevented by targets' using
"effective and timely counterstrategies" is combined with a
discussion of the particular counterstrategies that might be effective
that is both incomplete and references one counterstrategy--pricing more
aggressively-- that is unlikely to be of much use; and the EC's
suggestion that potential foreclosees will be able to protect themselves
from harm by exercising their buying power is both mysterious and wrong.
(106)

The ninth and final set of law-study vertical-conduct-focused
points I will rehearse at this juncture contains six points or sets of
points that relate to vertical mergers and acquisitions. I have already
recounted the first three: (1) the point that, although analyses of the
legality of vertical mergers and acquisitions under a
specific-anticompetitive-intent test of illegality focus on the motive
of an individual perpetrator of one or more vertical mergers or, in the
rare instances in which two or more of rivals have agreed to execute
parallel vertical mergers or acquisitions, on the motives of these
multiple perpetrators, analyses of the legality of "vertical
mergers" under a lessening-competition test of illegality should as
a matter of law focus on the competitive impact of a rule allowing all
members of a set of rivals to execute such mergers or acquisitions
(under Article 101(1) if the mergers in question would generate no
organizational economic efficiencies) as well as on these actors'
ability to establish an organizational-allocative-efficiency
(natural-monopoly-type) defense for their conduct in a Clayton Act case
or an Article 101(3) efficiency defence in an Article 101 case, (2) all
the law-study points I have already discussed about the economics of
foreclosure and the foreclosure-related positions and general positions
that U.S. and E.U. courts and antitrust-enforcement authorities have
taken, and (3) the law-study's explanation of why
vertically-integrated firms may make nonpredatory decisions not to
supply independents or nonpredatory but competition-distorting decisions
to charge independents prices for inputs or final products that exceed
the upstream division's marginal costs while "charging"
its own downstream division a marginal-cost-equaling shadow price for
the product in question.

I want here to recount three additional law-study points or sets of
points about vertical mergers and acquisitions. The first additional
vertical-merger-focused law-study point is that vertical mergers and
acquisitions can yield Sherman-Act-licit gains in at least three
intrinsically-lawful ways that their horizontal and conglomerate
counterparts cannot:

1. by creating a merged firm that can earn additional profits
because it can use hierarchical controls to influence its own
employees' decisions as opposed to using contract clauses and sales
policies to influence the decisions of independents,

2. by creating a merged firm that can take better advantage of
continuous-flow economies, and

3. by creating a merged firm that can coordinate its own downstream
and upstream divisions' behavior without revealing relevant
information about its competitive position and plans to an independent
that might use such information to enter another level of the
information-provider's business or might sell that information to
an actual or potential rival of the information-provider. (107)

The law-study also points out that a vertical merger or acquisition
can enable a regulated firm to conceal its price or rate-of-return
violations more cost-effectively. However, although the profits a
vertical merger or acquisition yields on this account are not
Sherman-Act-licit, they are also not Sherman-Act-illicit. (108)

The second additional vertical-merger-focused law-study point I
want to recount relates to the claim that vertically-integrated concerns
often violate the law (the applicable test of illegality is usually not
specified in this context) by engaging in price-squeezes--i.e., by
charging a rival manufacturer or distributor a price for an input or
final product that is so high relative to the price the
vertically-integrated concern charges for its product as a manufacturer
or distributor to preclude the independent from breaking even. The
law-study points out that, at least if (as I believe) it is not more
difficult to establish the predatory character of a predatory
price-squeeze than it is to establish the predatory character of
refusing to deal with the potential target of a predatory
"squeezing price," vertically-integrated firms will find it
more profitable to practice predation by refusing to deal with their
targets than by going to the trouble of subjecting their targets to
predatory price-squeezes. The law-study also points out that, unlike the
U.S. courts, which have finally decided to reject
predatory-price-squeeze claims, (109) E.U. courts continue to find
pricing conduct they place in this category to constitute an
Article-102-violating exclusionary abuse of a dominant position when the
pricing is done by a dominant firm. (110)

The third and final set of additional vertical-merger-focused
law-study points I want to make here relates to the
"post-Chicago-school" analysis of vertical mergers. The
law-study offers five criticisms or sets of criticisms of the
post-Chicago-school scholarship on vertical mergers. (111) The first is
that this literature does not distinguish between policy-analysis and
legal analysis--assumes that any policy-argument that can be made for or
against vertical mergers will count respectively for and against their
legality under U.S. antitrust law (since the relevant scholars are
Americans who are focused on U.S. law). The second set of criticisms
relates to this scholarship's analysis of the impact that vertical
mergers will have on foreclosing conduct and what I call contrived
oligopolistic conduct: the literature on foreclosure does not pay any
attention to whether the foreclosing conduct is predatory or inherently
profitable, and the literature on contrivance ignores many of the ways
in which vertical mergers will affect the profitability of contrivance
(e.g., by yielding static efficiencies that increase the safe profits
the merged firm must put at risk to practice contrivance) and sometimes
employs Cournot models to analyze the likely impact of such mergers on
contrivance, which are both unrealistic and inappropriate. The third set
of criticisms relates to the argument that vertical mergers will lessen
competition because early vertical integrators will obtain an advantage
over later vertical integrators since early integrators will be able to
strike a better deal with merger/acquisition partners than will later
integrators. The law-study points out that there is no reason to believe
that early integrators will have such an advantage and that, even if
they do, there is no reason to believe that that reality will cause
vertical mergers to lessen competition (or to violate a
specific-anticompetitive-intent test of illegality). The
law-study's fourth criticism of this post-Chicago-school literature
focuses on its acceptance of a particular Chicago-school policy-argument
for vertical mergers--viz., the argument that the vertical merger of
successive "monopolists" (say, a monopolistic producer and a
monopolistic distributor) will increase economic efficiency by reducing
the prices that are charged to ultimate consumers by converting a
situation in which an independent manufacturer charges an independent
distributor a supra-marginal-cost per-unit price for its product that
causes the distributor to charge higher per-unit prices than it would
otherwise charge into one in which an integrated firm instructs its
distributive division to price its products on the assumption that the
distributive division's marginal cost of goods sold equal the
marginal costs the manufacturing division incurred to supply the
distributive division. The law-study criticizes this argument on two
grounds: (1) it assumes that the independent manufacturer would charge
the independent distributor exclusively single per-unit prices when in
fact many and probably most manufacturers charge a mixture of lump-sum
fees and much lower per-unit prices to their independent distributors
(i.e., the argument exaggerates the difference between the per-unit
price the independent distributor would pay and the per-unit price that
the distributive division of a vertically-integrated firm would be
instructed to assume it is paying for the goods it sells); and (2) the
argument's assumption that any merger-generated decrease in the
price charged ultimate consumers will increase economic efficiency
(though possibly correct) is asserted and not justified by scholars who
fail to understand the central point of The General Theory of Second
Best--viz., that, in an economy that contains other Pareto
imperfections, there is no general reason to believe that choices that
reduce one imperfection (e.g., cause a particular price or set of prices
to be more competitive) will even tend on that account to increase
economic efficiency. (Of course, supporters of this argument could
abandon their economic-efficiency claim and claim instead that their
argument establishes that vertical mergers between
"monopolists" are desirable because they benefit the
monopolists' customers.) The fifth post-Chicago-school argument the
law-study criticizes is another Chicago-school argument for the
desirability of at least some vertical mergers that the
post-Chicago-school revisionists accept: the argument that vertical
mergers between the manufacturer of an input against which substitution
is possible and a user of that input will increase economic efficiency
by preventing jointly-unprofitable substitutions against that input. The
law-study criticizes that argument by pointing out (1) that it ignores
the fact that an independent input-manufacturer would be likely to
reduce or eliminate such jointly-unprofitable substitutions against its
input by charging its customers a lump-sum fee for the right to purchase
its input at a per-unit price equal to or close to the
input-manufacturer's transaction-surplus-maximizing marginal costs,
by using tie-ins to shift the locus of some or all of its
supra-TSM-marginal-cost per-unit pricing to the input that can be
substituted against its input or to an input against which substitution
is not possible, or by using end-product-royalty schemes or
total-output-supply reciprocity agreements that enable it to capture the
buyer surplus that it would otherwise generate by charging the
manufacturer a per-unit price for its input equal to the
input-producer's TSM marginal cost and (2) that, once more, it
ignores The General Theory of Second Best in assuming that choices that
increase the chooser's joint profits without violating the
specific-anticompetitive-intent test of illegality will increase
economic efficiency (although I would agree that in the vast majority of
this set of cases choices that increase the perpetrators' joint
profits will be economically efficient).

The final category of business conduct that the law-study analyzes
contains joint ventures and other sorts of functionally-related
collaborative arrangements. I will restrict myself here to rehearsing
only four of the points or sets of points the law-study makes about
these categories of conduct. The first set of such points articulates
the five or perhaps six Sherman-Act-illicit functions that joint
ventures can perform: increasing the parents' profits

1. by freeing them from the price competition they wage against
each other when selling their preexisting products (joint-sales-agency
joint ventures) and by increasing the profits the parents realize by
inducing their other rivals to cooperate with the parents'
contrived oligopolistic pricing (by facilitating the parents' [A]
joint communication of their contrived oligopolistic intentions, [B]
sharing of sales-record information, information about the parameters
other than rival undercutting that determine the percentages of their
old customers they retain, of their rivals' old customers they
secure, and of new buyers they secure, information about the competitive
positions of particular joint rivals in relation to particular buyers,
etc., [C] collaborative reciprocation to collaborators, and [D]
collaborative retaliation against undercutters),

2. by confronting each other and their joint rivals with
retaliation barriers to entry or expansion,

3. by practicing other sorts of predation against joint rivals
(primarily by increasing their ability to coordinate their predatory
moves),

4. by enabling the parents to substitute one joint-venture QV
investment for the two QV investments the parents would otherwise have
made (sometimes by including in the joint-venture agreement a clause
prohibiting the parents from investing in the joint venture's
market but anyway by giving each parent an interest [often, a 50%
interest] in the joint venture's QV investment),

5. by enabling one or both parents to induce the other to agree not
to enter its fellow-parent's markets when each agreeing parent
would otherwise have been an effective potential competitor of the other
parent, and perhaps

6. by enabling the parents to eliminate the competition they wage
against each other as buyers (most obviously if the joint venture is a
buyer-coop but in other cases as well)--"perhaps" because of
the uncertainty of whether the Sherman Act and Articles 101 and 102
prohibit reductions in buyer competition. (112)

The second set of law-study joint-venture-focused points I want to
recount here relates to the conditions under which clauses in
joint-venture agreements that prohibit the joint venture from entering
the parents' markets and/or that prohibit the parents from entering
the joint venture's market or each other's markets are
correctly said (in antitrust jargon) to be "ancillary" to a
joint venture--a characterization that is legally significant because
only those restraints that are deemed to be "ancillary" are
considered to be lawful. The law-study points out that the U.S. courts,
the EC, and the E.U. courts have all failed to define the concept of
ancillarity clearly: have never declared whether a restraint is
ancillary if (1) it increases the Sherman-Act-licit profits the joint
venture yields (e.g., by making it profitable for one or more parents to
communicate to the joint venture information that will increase the
joint venture's proficiency and profitability [information whose
communication to the joint venture would not have been profitable to the
communicator had the joint venture or the other parent[s] been able to
use it to compete against the communicating parent), (2) it critically
increased the ex ante profitability of the joint venture, or (3) (in my
view, the legally correct position) it would be deemed legal under a
specific-anticompetitive-intent test of illegality. (113)

The third law-study joint-venture-focused set of points I want to
reference is actually a series of points made in response to proposals
that it would be cost-effective and legally appropriate for courts to
use simple filters to dismiss joint-venture cases before detailed
evidence about the specific-anticompetitive-intent of the parents or the
competitive impact of the joint venture is introduced. The law-study
uses a hypothetical to illustrate the reasons why no such filters can be
sufficiently accurate to be cost-effective or justifiable as a matter of
law--in particular, to demonstrate that (1) one cannot tell whether a
joint venture created by an agreement that imposes no restraints on the
joint venture or the parents would violate the
specific-anticompetitive-intent test of illegality or the
lessening-competition test of illegality without obtaining a great deal
of detailed evidence about the relevant business situation (inter alia,
about the barriers to investment facing the parents and various other
potential investors and about the dynamic efficiencies the joint venture
would generate) and (2) one cannot tell whether any restraints a
joint-venture agreement imposes on the joint venture and/or the parents
are lawful without obtaining a great deal of similar information about
the situation in the areas of product-space in which respectively the
joint venture and its parents operate. (114)

The fourth and final law-study point about joint ventures I want to
rehearse at this juncture is that both the U.S. Antitrust
Division's approach to joint ventures (115) and the EC's
approach to joint ventures (116) respectively in "markets" in
which the parents already operate or in "markets" that are
"adjacent" to markets in which the parents already operate
place too much weight on the seller-concentration of these markets.

Conclusion

This article summarizes what I take to be the most important
theoretical contributions of my two-volume study of Economics and the
Interpretation and Application of U.S. and E. U. Antitrust Law. The
summaries are designed to put into appropriate context the other
articles in this issue, but I hope they are valuable in themselves. I
have tried to make this article's account of the law-study's
positions comprehensible in themselves, but readers who want to pursue
these ideas would probably be well-advised to turn to their more
complete exposition in the study. Although this article also gives
relatively detailed accounts of my interpretations of the U.S. antitrust
statutes, the antitrust provisions of E.C./E.U. Treaty, and the EMCR,
its treatments of the U.S. DOJ and DOJ/FTC Guidelines, various EC
Guidelines and Communications, the EC's BERs (block-exemption
regulations), and the U.S. and E.C./E.U. antitrust case-law are very
selective and partial. The law-study contains exhausting if not
exhaustive discussions of all this material.

The Introduction indicated that the law-study has a
not-yet-published policy-sequel--The Welfare Economics of Antitrust
Policy and U.S. and E.U. Antitrust Law: A Second-Best-Theory-Based
Economic-Efficiency Analysis. The policy-sequel recognizes that
antitrust policy should not seek solely to maximize economic
efficiency--that, inter alia, antitrust policy should also prevent
immoral business conduct (conduct that manifests specific
anticompetitive intent), punish the perpetrators of such conduct, enable
victims of such wrongful behavior to secure redress, effectuate
defensible distributive-justice goals, and help to instantiate the
liberal democratic ideal of giving all members of the relevant political
community equal influence on their government's decisions. The
policy-sequel also recognizes that increases in economic efficiency are
not valuable in themselves--that "increases in economic
efficiency" (in the monetized sense in which that expression is
defined in Part 2A of this article) are morally valuable only to the
extent that they are associated with increases in total utility,
increases in the satisfaction of preferences, or increases in the extent
to which the society's members' have a meaningful opportunity
to take their lives morally seriously by fulfilling their moral
obligations, developing morally defensible personal conceptions of the
good, and leading a life that is consistent with their respective
conceptions of the good. (117)

Nevertheless, the policy-sequel focuses almost exclusively on the
economic efficiency of (1) the business conduct that antitrust policies
cover and (2)(A) the different antitrust policies that could be devised,
(B) the antitrust policies that were created by the relevant U.S.
statutes, enforcement-agency Guidelines, and judicial decisions, and (C)
the antitrust policies that were created by the E.C./E.U. treaty, the
EC's Guidelines, Communications, and Regulations and the EC's
and the E.C./E.U. courts' case-resolutions. The policy-sequel uses
a unique protocol to analyze the economic efficiency of the
antitrust-policy-covered conduct and antitrust-policy options it
considers. This protocol is distinguished by the fact that it responds
appropriately to the basic negative and positive corollaries of The
General Theory of Second Best (118)--the theory that demonstrates that,
if one or more of a series of sufficient conditions for the achievement
of any optimum cannot be or will not be fulfilled, one cannot conclude
without further argument that a choice that fulfills more of the
remaining conditions will even tend on that account to bring one closer
to the optimum. Roughly speaking, this conclusion is correct because--in
general--the "imperfections" any choice will eliminate will be
as likely to have counteracted the net effect of the remaining
imperfections as to have compounded their net effect. When the relevant
optimum is "maximizing economic efficiency," the relevant set
of sufficient conditions for its attainment are the Pareto-optimal
conditions--perfect seller competition, perfect buyer competition, no
real externalities, no taxes on the margin of income, resource-allocator
sovereignty (each resource allocator knows everything he or she needs to
know to identify the choice that maximizes the satisfaction of his or
her preferences, given the budget constraint he or she faces),
resource-allocator maximization (each resource-allocator makes the
choice that the information he or she possesses implies would maximize
the satisfaction of his or her preferences, given the operative
budget-constraint), and no (critical) buyer surplus. When the
policy-choices whose economic efficiency is at issue are choices about
engaging in antitrust-policy-covered business conduct or antitrust/
competition policy-choices, the basic negative corollary of The General
Theory of Second Best is that one cannot justify the conclusion that
business conduct or an antitrust policy that increases/decreases seller
or buyer competition will increase/decrease or even tend to
increase/decrease economic efficiency on that account by citing the
facts that perfect seller competition and perfect buyer competition are
Pareto-optimal conditions (belong to a set of sufficient conditions for
the securing of the economic-efficiency optimum). Regardless of whether
the choice whose economic efficiency is to be investigated is an
antitrust-policy-covered business-choice or an antitrust policy, the
basic positive corollary of The General Theory of Second Best is that
the economically-efficient protocol for analyzing the economic
efficiency of any choice must at a minimum instruct the analyst to
devote economically-efficient amounts of resources inter alia (1) to
identifying the various categories of economic inefficiency (defined by
the category of resource allocation with which they are associated)
whose magnitudes the choice may affect, (2) to analyzing the different
ways that the economy's Pareto imperfections interact to cause or
not cause each category of economic inefficiency as well as the ways in
which other parameters affect the amount of each category of economic
inefficiency in the economy, given the Pareto imperfections it contains,
and (3) investigating the prechoice magnitudes of the economy's
Pareto imperfections and other economic-inefficiency-affecting
parameters and the impacts of the choice whose economic efficiency is at
issue on the magnitudes of the economy's Pareto imperfections and
other economic-inefficiency-affecting parameters.

The protocol for economic-efficiency analysis that the
antitrust-policy sequel uses meets these three requirements. I call this
protocol a distortion-analysis protocol because it focuses to a
substantial extent on the prechoice and postchoice magnitudes of the
aggregate distortions that the economy's Pareto imperfections
generate in the profits yielded by relevant exemplars of all categories
of resource allocation--i.e., on the differences between the profits
they respectively yield the resource-allocating principal and their
respective economic efficiency. Such aggregate profit-distortions are
salient because virtually all economic inefficiency is caused by
"critical distortions" in the profits yielded by resource
allocations that were or were not executed--i.e., by positive
distortions in the profits yielded by resource allocations that took
place that resulted in their being at least normally profitable for
their respective resource-allocator principals despite the fact that
they were economically inefficient and by negative distortions in the
profits that would have been yielded by resource allocations that did
not take place that resulted in their being less than normally
profitable for their resource-allocator principals despite the fact that
they would have been economically efficient.

I will now describe in some detail the distortion-analysis protocol
that the policy-sequel uses to predict or post-diet the economic
efficiency of antitrust-policy-covered business conduct and antitrust
policies. I should state at the onset that this protocol is designed to
be "third-best allocatively-efficient"--i.e., allocatively
efficient given the fact that theoretical and empirical research is
always allocatively-costly and is usually imperfect. The fact that the
economic-efficiency-analysis protocol that the policy-sequel uses is
third-best allocatively efficient is manifest in two of its features.
First, at each of its stages, the protocol instructs the analyst to
execute only those theoretical or empirical research-projects whose
execution is third-best allocatively efficient--i.e., to execute only
those research projects whose predicted allocative benefits (the
allocative benefits they would generate by increasing the economic
efficiency not only of the choice under consideration but of other
choices as well by increasing the correctness of relevant theoretical
results and the accuracy of relevant parameter-estimates) exceed their
predicted allocative cost (the allocative value that the resources
devoted to any relevant research-project would generate in their
alternative employs plus the allocative cost of delaying any
policy-decision to enable the decision maker to take advantage of the
relevant research-results plus the economic inefficiency the government
generates to finance the relevant research-project). This
third-best-allocatively-efficient character of the protocol for
economic-efficiency analysis that the policy-sequel uses is also
manifest in the protocol's instructing the analyst to base his or
her conclusions about the magnitude of various parameters on
estimates/guesstimates. Second, the third-best-allocatively-efficient
character of the protocol is also manifest in its instructing the
economic-efficiency analyst to base his or her conclusions about the
effect of the choices they are reviewing on the amount of some
categories of resource misallocation in the economy as a whole on TBLE
estimates/guesstimates of their impacts on the amount of such resource
misallocation in a TBLE-large random sample of the economy's
ARDEPPSes. I should acknowledge that this account of the third-best
allocative efficiency of the economic-efficiency protocol that the
policy-sequel uses ignores an infinite-regress problem for which I do
not have a good solution--viz., the problem connected with the fact
that, to proceed in a third-best-allocatively-efficient way, the
economic-efficiency analyst will have to make a
third-best-allocatively-efficient decision about whether to think about
whether to think about whether to think about whether to think about ...
the economic efficiency of executing particular research-projects.

In any event, the economic-efficiency-analysis protocol that the
antitrust-policy sequel employs has five components. The first focuses
on the impacts that the various types of business conduct that antitrust
policy could cover and various antitrust policies would have on the
first six categories of resource misallocation listed in Part 2B if they
would not affect what I call the organizational allocative efficiency of
any firm by enabling it to combine or precluding it from combining
assets that are complementary for scale or non-scale reasons. All of
these categories of economic inefficiency are "relative total
allocative cost" (RTLC) resource misallocations--i.e., all result
because resources are allocated in economically-inefficient proportions
among uses in a single category in different ARDEPPSes or between two
categories of use. The second component of the protocol focuses on the
impacts that the various types of business conduct that antitrust
policies could cover and various possible antitrust policies would have
on the seventh and eighth categories of resource misallocation listed in
Part 2B if they would not affect the extent to which one or more firms
combined assets that were complementary for scale or nonscale reasons.
All of these categories of economic inefficiency are
non-poverty/inequality-generated "discrete choice" (DC)
resource misallocations--i.e., resource misallocations that result
because a resource allocator makes one rather than another discrete
resource-allocating choice (e.g., chooses to use one known production
process rather than another or chooses to buy a homogeneous product from
one supplier rather than another). The third focuses on the impacts that
antitrust-policy-covered conduct and possible antitrust policies have on
economic efficiency by enabling firms to increase or preventing them
from increasing their organizational allocative efficiency (the
allocative efficiency of the production process they use to produce
their outputs of given goods, the allocative efficiency of the QV
investments they create at a given allocative cost, or the allocative
efficiency of the production-process-research projects they execute at a
given allocative cost) by combining assets that are complementary for
scale or nonscale reasons. The fourth component of the protocol
investigates the impact that various types of antitrust-policy-covered
conduct and various antitrust policies have on the amounts of various
subcategories of economic inefficiency the economy generates because of
the poverty and/or income/wealth inequality in the society in question.
And the fifth focuses on the impacts that various types of
antitrust-policy-covered business conduct and various possible antitrust
policies would have on three categories of allocative costs--the
allocative transaction costs generated in the economy in question, the
risk and uncertainty costs that relevant individuals bear and the
allocative costs that the prospective bearers of such costs generate to
reduce them, and the economic inefficiency the government generates when
financing its operations.

The component of the protocol for analyzing the impact that any
antitrust-policy-covered business conduct or any antitrust policy will
have on the amounts of the various RTLC categories of resource
misallocation the economy contains probably responds to The General
Theory of Second Best more complicatedly than does any other component
of the economic-efficiency analysis protocol that the antitrust-policy
sequel uses. Roughly speaking, the RTLC-resource-allocation-focused
component of the economic-efficiency-analysis protocol instructs the
analyst to predict or post-diet the impact of any antitrust policy on
the six RTLC categories of resource misallocation in the following way:

1. derive (presumably-different) formulas for the aggregate
distortion in the profits yielded by any economics-marginal resource
allocation associated respectively with each RTLC category of resource
misallocation--six formulas that collectively manifest the different
ways in which all relevant Pareto imperfections in an economy interact
to distort the profits yielded by any economics-marginal resource
allocation (the least-profitable but not-unprofitable allocation in that
category in a specified ARDEPPS) associated respectively with each RTLC
category of resource misallocation;

2. identify a third-best-allocatively-efficiently-large random
sample of the economy's ARDEPPSes--the sample of ARDEPPSes on which
this component of the distortion-analysis protocol will focus;

3. generate third-best-allocatively-efficient estimates or
guesstimates of the pre-choice magnitudes of the parameters in the
formulas derived in Step (1) for the ARDEPPSes to be studied and
calculate the pre-choice and post-choice magnitudes of the aggregate
distortions in the profits yielded by the economics-marginal resource
allocations in the categories associated with the RTLC categories of
economic inefficiency in all ARDEPPSes that are to be studied;

4. in each studied ARDEPPS, generate a
third-best-allocatively-efficient estimate or guesstimate of the
attributes of the "resource-allocation marginal allocative product
curve" (MLP .../...) for each category of resource allocation
associated with a RTLC category of resource misallocation in any ARDEPPS
between the resource-allocation marginal-allocative-product figures
associated with the estimates/guesstimates of the prechoice and
postchoice aggregate distortions in the profits yielded by the
usually-changing economics-marginal resource allocation in the specified
category in the specified ARDEPPS where the curve in question is a curve
in a diagram whose vertical axis measures dollars and whose horizontal
axis measures the total allocative cost of the resources devoted to a
curve-specified category of use in a specified ARDEPPS (specified by an
entry that replaces the first ellipsis in the subscript of the symbol
for the curve) after having been withdrawn from a curve-specified
category of use in one or more specified ARDEPPSes (specified by an
entry that replaces the second ellipsis in the subscript of the symbol
for the curve) and the height of the MLP .../... curve at any TLC
quantity indicates the net allocative benefits that would be generated
by the use of the last (say) SI in resources (measured by their
allocative cost) that would bring TLC for the specified category of
resource allocation from and to specified ARDEPPSes to the quantity in
question and where the height of any MLP .../... curve at any TLC
quantity at which the last specified resource allocation yields zero
profits (as it would if the allocation were both economics-marginal and
mathematics-marginal and were executed by a sovereign maximizer) equals
SI minus the aggregate distortion in the profits the relevant resource
allocation yields;

5. in each ARDEPPS, for each category of resource allocation
associated with a RTLC category of resource misallocation, derive from
the formulas generated in Step (1) and the parameter
estimates/guesstimates made in Step (2) and Step (4)
estimates/guesstimates of the impact of the policy on the quantity of
that category of RTLC resource misallocation the ARDEPPS contains; and

6. sum the estimates/guesstimates of the policy's impacts on
each RTLC category of resource misallocation in all studied ARDEPPS to
calculate the policy's impact on the total amount of each such
category of resource misallocation the studied ARDEPPSes contain and
derive an estimate/guesstimate of the policy's impact on the total
amount of each such category of resource misallocation the economy
contains by multiplying each such studied-ARDEPPSes choice-generated
change-in-resource-misallocation total by the ratio of the estimated
allocative cost of the resources devoted to the category of resource
allocation in question in the economy as a whole to the estimated
allocative cost of the resources devoted to the category of resource
allocation in question in the studied ARDEPPSes.

Although the following conclusion certainly is contestable and may
be wrong, I believe that it will prove to be third-best allocatively
efficient to use a protocol to analyze the impact of
antitrust-policy-covered business conduct or any antitrust policy on the
DC categories of resource misallocation that is less complicated than
the protocol that I think will be third-best allocatively efficient to
use when impacts on RTLC categories of resource misallocation are at
issue. More specifically, I think it will prove to be third-best
allocatively efficient to use the following protocol to analyze the
impact of antitrust policies on the categories of resource misallocation
referenced in the seventh and eighth items in the Part 2B list:

1. develop formulas for the aggregate distortion in the profits
yielded by any DC (discrete-choice) category of resource misallocation
(the distortion in those profits generated by all exemplars of all types
of Pareto imperfections) that equate those aggregate profit-distortions
with the sum of what I call the seven step-wise distortions that all
exemplars of each individual type of Pareto imperfection would generate
in the profits of each type of DC resource allocation--viz., the
distortions that respectively all exemplars of each type of Pareto
imperfection would generate in such profit-figures given the exemplars
of the other types of Pareto imperfections the relevant economy
contains;

2. devote a third-best-allocatively-efficient amount of resources
to determining (A) the frequency with which the sum of the six step-wise
distortions in the profits yielded by each category of DC resource
allocation that are generated by all exemplars of each individual type
of Pareto imperfection other than imperfections in seller competition
are non-zero when the imperfection-in-seller-competition- oriented
step-wise profit-distortion in that profit-figure is non-zero, (B) the
relative absolute sizes of the sum of the six relevant
non-imperfection-in-seller-competition-oriented step-wise distortions
and the imperfection-in-seller-competition-oriented step-wise
distortions in those cases in which both this
summed-step-wise-distortion figure and the
imperfection-in-seller-competition step-wise distortion are non-zero,
and (C) the correlation between the summed-step-wise-distortion figures
and the imperfection-in-seller-competition-oriented step-wise
distortions when both deviate significantly from zero; and

3. analyze the impact of the business conduct or antitrust policy
under review on each DC category of resource misallocation (A) by
devoting a TBLE amount of resource to estimating/guesstimating the
amount of that category of DC resource misallocations the relevant
economy would contain if the business conduct under review were not
engaged in or the antitrust policy under review were not adopted--i.e.,
(i) to estimating/guesstimating (a) the incidence of discrete choices in
the relevant category whose profit-yield would be inflated in those
circumstances (for which the aggregate profit-distortion would be
positive), (b) the relevant DC-by-DC magnitudes of the positive
distortions the profits yielded by those DC choices whose profits would
be inflated in question, and (c) the profits yielded by the relevant DC
choices and (ii) to generating an estimate/guesstimate of the amount of
that category of DC resource misallocation the relevant economy would
contain in the above circumstances by ascertaining the number of DCs in
the relevant category for which the positive profit-distortion exceeded
the profits yielded and the average amount by which in those cases the
positive profit-distortion exceeded the profits yielded and multiplying
the two amounts, (B) by devoting a TBLE amount of resources to making
the same estimates/guesstimates and calculations for the situation that
would prevail if the relevant business conduct were engaged in or the
relevant antitrust policy were adopted (inter alia, by examining how the
conduct or policy would affect the aggregate distortion in the profits
yielded by DC choices in the relevant category by altering the incidence
and magnitudes of the economy's various Pareto imperfections), and
(C) comparing the estimates/guesstimates of the total amount of the
relevant category of DC misallocation in the economy as a whole
pre-conduct/policy and post-conduct/policy: at a more-refined level, if
(as 1 suspect is true in the vast majority of relevant cases) (i) the
sum of the six non-imperfection-in- seller-competition-oriented
step-wise distortions in the profits yielded by DC resource allocations
for which the absolute imperfection-in-seller-competition-oriented
stepwise profit-distortion is significantly different from zero either
is near zero or has an absolute value that is much smaller than the
absolute value of the imperfection-in-seller-competition-oriented
step-wise distortion in the relevant profit-figure and is uncorrelated
with the imperfection-in-seller-competition- oriented step-wise
distortion in the relevant profit-figure and (ii) it would be not only
allocatively expensive but given (i) prohibitively allocatively
expensive to identify the cases in which the above relationships do not
obtain, analyze both the pre-choice magnitudes of the relevant aggregate
profit-distortions and the impact of the conduct or policy under review
on the aggregate distortion in the profits that the relevant discrete
choices generate on the assumption that the former figure equals the
imperfection-in-seller-competition-oriented step-wise distortion in
those profits and the latter figure equals the conduct-generated or
policy-induced change in the imperfection-in-seller-competition-oriented
step-wise distortion in that profit-figure, but if there is reason to
believe that the assumptions delineated after (i) and (ii) above are not
accurate either in general or in relation to some identifiable DC
resource allocations, analyze both the pre-choice aggregate
profit-distortions and the conduct/policyinduced changes in the
aggregate profit-distortions in a way that takes appropriate account
respectively of the sums of the six relevant pre-choice
non-imperfection-in-seller-competition
individual-Pareto-imperfection-oriented step-wise profit-distortions and
the predicted impact of the conduct or policy on those sums as well as
of the relevant pre-choice imperfection-inseller-competition-oriented
step-wise profit-distortions and the predicted impacts of the policy on
the latter step-wise distortions. (N.B.: this account reflects my
assumption that it will not be TBLE to base estimates/guesstimates of
economy-wide DC resource misallocation on estimates/guesstimates of
their magnitudes in a sample of the economy's ARDEPPSes because I
suspect that DC resource misallocations of any sort are most likely to
occur in particular ARDEPPSes that will be TBLE to identify.)

The third component of the distortion-analysis protocol for
predicting or post-dieting the economic efficiency of
antitrust-policy-covered business conduct or antitrust policies focuses
on the possibility that the business conduct or antitrust policy in
question will increase economic efficiency by enabling one or more firms
to combine assets that are complementary for scale or nonscale reasons
or will decrease economic efficiency by preventing one or more firms
from combining assets that are complementary for scale or nonscale
reasons--i.e., will on this account either increase or decrease the
economic efficiency of the production processes the firm(s) use, one or
more of the QV investments the firm(s) create(s) with resources of given
allocative cost, and/or one or more of the PPR projects the firm(s)
execute(s) with resources of given allocative cost (in my terminology,
will on this account either increase or decrease one or more firms'
organizational allocative efficiency). Business choices (to engage in or
not to engage in mergers, acquisitions, joint ventures, or internal
growth) and antitrust policies (to allow or prohibit mergers,
acquisitions, joint ventures, and internal growth) can either increase
businesses' organizational allocative efficiency by securing the
combination of complementary assets or decrease businesses'
organizational allocative efficiency by resulting in complementary
assets not being combined.

The fourth component of the distortion-analysis protocol for
predicting or post-dieting the economic efficiency of
antitrust-policy-covered business conduct or various antitrust policies
focuses on the ways in which such conduct or policies will increase or
decrease economic efficiency by decreasing or increasing poverty and
income/wealth inequality (say, by decreasing or increasing prices). This
possibility is important because, especially in an economy that contains
Pareto imperfections or would contain Pareto imperfections if some
people were poor or income and wealth were distributed unequally,
poverty and/or income/wealth inequality generate economic inefficiency
(1) by increasing the amount of misallocation the economy generates
because economically-efficient investments in the human capital of
children and adults are not made, (2) by increasing the amount of
misallocation that consumption-choices (say, to buy and operate ugly,
breakdown-prone, accident-prone, noisy, air-polluting cars or to rent
ugly and fire-and-disease-spreading housing units) generate because it
is advantageous for individuals when they are poor to make
external-cost-generating consumption-choices that are economically
inefficient, (3) by increasing the amount of misallocation generated
because the relevant economy's members make
privately-disadvantageous consumption-choices that are economically
inefficient--i.e., because (A) by reducing their preparedness for
schooling and the quality of the education they receive both inside and
outside schools, the poverty of the poor increases both the frequency
with which the individuals who are poor fail to understand the
attributes of products and their full cost to them and the frequency
with which they do their maths wrong or make consumption choices
unthinkingly and (B) by increasing their frustration and unhappiness,
the poverty of individuals who are poor leads them to discount future
benefits too highly from the perspective of their own lifetime welfare,
(4) by increasing the amount of misallocation that poverty causes by
inducing individuals who are poor to make economically-inefficient
decisions to perform dangerous, lawful labor in all the ways that it
causes poor individuals to make economically-inefficient consumption
decisions that are not in their interest and, in a society in which poor
individuals who have been injured at work or their families receive
various types of government-transfers for which their non-poor
counterparts would not be eligible, by rendering economically
inefficient some decisions to perform dangerous lawful labor that are
objectively beneficial for those who make them (perhaps given their
concern for their families), (5) by increasing the amount of
misallocation that people who are poor or people who have significantly
less income and wealth than does the average participant in the relevant
economy generate by engaging in economically-inefficient criminal
activities by making them less concerned about the impact of their
criminal choices on their victims (by alienating them), by reducing the
difference between the attractiveness of life in prison and life without
successful crime outside prison, by causing them to use too high a
discount-rate to calculate the present value of their future welfare,
and by causing them to be too optimistic about the profitability of
crime for reasons other than the discount-rate they apply to their
future welfare, (6) by reducing the political influence of the
individuals who are poor and thereby increasing the amount of economic
inefficiency the government of the relevant society generates because
its choices are based on a calculation that places a lower weight on the
average dollar gained or lost by the individuals who are poor or who
have lower-than-average income and wealth than on the average dollar
gained or lost by the individuals who are not poor or who have
higher-than-average income and wealth, and hopefully (7) by increasing
the economic inefficiency the economy generates because its distribution
of income and wealth disserves (on balance) the "external
preferences" of the members of and participants in the society in
question (their nonparochial preferences for the resources and
opportunities that others have). In any event, for the above reasons,
the protocol that the antitrust-policy sequel uses to predict or
post-diet the impact of various antitrust-policy-covered conduct and
various antitrust policies on economic efficiency will take into account
both the policy's impact on poverty and income/wealth inequality
and the other parameters that the preceding list implies will affect the
economic-efficiency consequences of the policy's distributive
impact.

The fifth and final component of the economic-efficiency-analysis
protocol that the antitrust-policy sequel uses focuses on the impact of
antitrust-policy-covered business conduct and antitrust policies on
allocative transaction costs, risk and uncertainty costs (which are
allocative as well as private) and the allocative costs that individuals
generate to reduce the amount of such costs they bear, and the economic
inefficiency that governments generate when financing their operations.
I start with allocative transaction costs, which will usually not equal
their private counterparts (because Pareto imperfections will usually
distort the private value of the resources used up as transaction costs
would have generated for their alterative employers and hence their
private cost to the actor who used them up as transaction costs). The
business conduct that antitrust policies cover (the execution of
mergers, acquisitions, and joint ventures, the use of fancy
pricing-techniques, the practice of contrived oligopolistic pricing,
predatory pricing, or other types of predatory conduct, the use of
various contractual surrogates for vertical integration, etc.) can
generate allocative transaction costs directly and can also generate
such costs indirectly (for example, by causing individuals who lose
their jobs when a merger leads to the rationalization of production to
apply for government-transfers). Antitrust policies can also affect the
amount of allocative transaction costs generated in the relevant economy
both directly (the allocative transaction cost the government generates
directly when devising, adopting, and enforcing the policy) and
indirectly (by inducing businesses to make allocative-transaction-costly
moves to conceal their illegal behavior and causing them to generate
allocative transaction costs to defend themselves in criminal and civil
litigation, and [in the United States] by inducing private parties to
generate allocative transaction costs to make legal claims against
businesses that they claim have inflicted recoverable losses on them by
violating the antitrust laws). Antitrust policies can also reduce the
amount of allocative transaction costs that are generated by deterring
business conduct (e.g., contrived oligopolistic pricing or the use of
fancy pricing-techniques) that would have generated allocative
transaction costs directly or indirectly (say, by causing employees it
would render redundant to make claims for government transfers). The
antitrust-policy sequel takes third-best-allocatively-efficient account
(see below) of all such allocative-transaction-cost consequences.

Business conduct and antitrust policies can also affect the amount
of risk and uncertainty costs individuals bear and the allocative costs
that individuals generate to reduce the risk and uncertainty costs they
bear. I suspect, however, that although antitrust policies will affect
the costs that some face because of the risk of their being the
plaintiff or defendant in an antitrust case and will induce some
individuals to make allocative-costly moves to reduce such risk costs,
it will not prove to be third-best allocatively efficient to consider
these possibilities beyond the consideration given to them in the
allocative-transaction-cost analysis.

The final "allocative cost" that the policy-sequel's
protocol for analyzing the economic efficiency of any
antitrust-policy-covered business conduct or any antitrust policy
addresses is the impact that the conduct or policy will have on the
fiscal position of the government and hence on the amount of economic
inefficiency the government generates when financing its operations.
Specifically, on this account, the protocol the antitrust-policy sequel
uses instructs the analyst (1) to estimate/guesstimate the fiscal impact
of the conduct or antitrust policy under review (its impact on the
fines, tax revenues, and court fees the relevant government collects and
the private transaction costs it incurs to devise, pass, and implement a
relevant antitrust policy) and (2) to estimate/guesstimate the economic
efficiency of the decisions that the choice under review causes the
relevant government to make by altering its fiscal position--(A) if the
analyst concludes that the choice under review will worsen the
government's fiscal position, (i) estimate/guesstimate the extents
to which the government will respond to this reality by raising
tax-rates or imposing new taxes, by raising the prices it charges for
goods and services it supplies, by printing money or selling bonds to
"finance" the relevant deficit, or by eliminating other
expenditures and (ii) analyze the economic-efficiency effects of these
government responses and (B) if the analyst concludes that the choice
under review will improve the government's fiscal position, (i)
estimate/guesstimate the extents to which the government will respond to
this reality by lowering tax-rates or eliminating some taxes, lowering
the prices it charges for goods and services, destroying some of the
money it possesses or retiring some government debt, or making other
expenditures and (ii) analyzing the economic efficiency of each of these
responses.

I will now attempt to make clear why it is important to use the
distortion-analysis protocol just outlined to analyze the economic
efficiency of a policy-choice--in particular, why this protocol will
generate more accurate economic-efficiency predictions than will
conventional first-best-allocative-efficiency analyses (which [usually
implicitly] assume that the only Pareto imperfection in the relevant
economy is the Pareto imperfection that the policy under review targets
or directly affects). For this purpose, I will compare Oliver
Williamson's canonical (first-best-allocative-efficiency) analysis
(119) and a simplified version of the TBLE distortion-analysis-protocol
analysis of the economic efficiency of horizontal mergers that convert a
perfectly-competitive industry into a pure monopoly and, in the process
of so doing, simultaneously (1) generate allocative production
efficiencies that result in the merged firm's facing lower marginal
costs than the merger partners would have faced after the date of the
mergers and (2) despite this fact, create a situation in which the
monopolistic merged firm's unit output is lower than the unit
output that the merger partners would have produced after the date of
the mergers (by creating a merged company whose profit-maximizing
[supra-marginal-cost] price is sufficiently higher than its marginal
cost to exceed the profit-maximizing price that each individual merger
partner would have charged after the date of the mergers (the price that
would have equaled the [higher] marginal cost each of the merger
partners would have had to incur to produce their respective marginal
units of output at the output at which their marginal cost curves cut
their average total cost curves from below).

I will first compare Williamson's and my analyses of the two
economic-efficiency effects of such mergers that Williamson does
consider: (1) their reducing the cost the merged firm incurred to
produce its post-merger output below the cost the merger partners would
have incurred to produce that output after the date of the mergers and
(2) its affecting economic efficiency by reducing the merged firm's
unit output below the combined unit outputs that the merger partners
would have produced after the date of the mergers had they not merged.
For convenience, I will address the reduced-production-cost issue on the
assumption that the merged firm faced and the mergers partners would
have faced horizontal MC curves and that the mergers lowered costs
exclusively by lowering the MC curve the merged firm faced below the MC
curve that each merger partner would have faced after the date of the
mergers. Williamson concludes that the economic-efficiency gain that the
mergers generate by lowering the total private variable cost that the
merged firm incurs to produce its unit output below the total private
variable cost that all the merger partners acting separately would have
incurred to produce that unit output after the date of the mergers
equals the private-cost reduction just specified--i.e., equals the
mergers-generated reduction in per-unit marginal cost times the merged
firm's unit output. Williamson's conclusion derives from his
implicit first-best assumptions that (1) the MC curve that would have
been operative absent the mergers (the MC curves the merger partners
would have faced after the date of the mergers) coincides with (is
identical to) the marginal allocative cost (MLC) curve that would have
been operative absent the mergers (the curve that indicates the
allocative value that the resources devoted to producing successive
units of the good in question absent the mergers would have generated in
their alternative uses) and (2) the MC curve the merged firm faced after
the date of the merger coincides with the MLC curve for the merged
firm's production after the date of the mergers. Although these
assumptions would always be correct if the economy contained no Pareto
imperfection other than the imperfection in seller price-competition the
mergers would generate, they will be correct only rarely and
fortuitously in the real world, which contains a myriad of other Pareto
imperfections that distort the private cost of the resources the merged
firm did use and the merger partners would have used after the date of
the mergers to produce the merged firm's unit output. For example,
if the resources that the merged firm did use and the merger partners
would have used to produce the merged firm's unit output were
withdrawn/would have been withdrawn from the production of units of
output of other goods by imperfect competitors that faced
downward-sloping demand curves and did not engage in price
discrimination or use any other fancy pricing-techniques, the
imperfections in seller price-competition that these alternative
resource-users faced would cause the MC curves that would have been
faced by the merger partners after the date of the mergers to be lower
than the MLC curve for the merger partners' production after the
date of the mergers and would cause the MC curve the merged firm faced
to be lower than the MLC curve for the merged firm--i.e., would deflate
the private cost respectively to the merger partners after the date of
the merger and the private cost to the merged firm of producing the
merged firm's unit output by deflating those resources'
private values to their alternative employers (which determines the
prices that the merger partners and the merged firm, respectively would
have to pay and did pay for them)--i.e., by causing these
resources' private values to their alternative users to be lower
than the allocative values the resources would have generated in their
alternative users' employ. This conclusion reflects three facts:
(1) the private value the resources would have generated for such
alternative users is their marginal revenue products for these
alternative users--(the marginal physical products the resources would
have yielded their alternative employers) times (the [average per-unit]
marginal revenues their alternative users would have respectively
obtained by selling the output-units that the resources in question
would have produced for them); (2) the allocative values that these
resources would have generated in these alternative uses is their
marginal allocative products in these alternative uses--if, for
simplicity, one ignores the distorting effects of other types of Pareto
imperfections, this marginal allocative product equals (the relevant
resources' marginal physical products for their alternative
employers) times (the prices for which the units of the other goods the
resources would have enabled their alternative employers to produce
could have been sold); and (3) marginal revenue is less than price for
imperfectly-competitive sellers that face downward-sloping demand curves
and do not engage in price discrimination. But if the two MC curves are
lower than their MLC counterparts, Williamson's conclusion that
that economic-efficiency gains the mergers generate by reducing the
private cost of producing the merged firm's output equals the
private-cost savings they enable the merged firm to realize--his
conclusion that the per-unit reduction in marginal costs equals the
per-unit reduction in marginal allocative costs--will be incorrect. If,
for example, each MC curve understates MLC by 20%, the per-unit
private-marginal-cost saving will be 20% lower than the per-unit
marginal-allocative-cost saving: thus, if the merger reduces private
marginal cost per unit from $10 to $5 and marginal allocative cost from
$12 to $6, the private cost-saving in question will be $10-$5 = $5 per
unit of output but the relevant allocative-cost saving will be $12-$6 =
$6 per unit of output.

The actual relationship between marginal cost and marginal
allocative cost will depend on the percentages of resources used to
produce successive units of the product in question that are withdrawn
from UO-increasing, QV-creating, and PPR-executing uses and on the signs
and magnitudes of the percentage-distortions in the private benefits
that the resources in question would have conferred on their alternative
employers in each of these three categories of use. These
percentage-distortion figures will depend not only on imperfections in
seller price-competition in the rest of the economy but on the
incidences and magnitudes of many other types of Pareto imperfections,
which would probably be third-best allocatively efficient to take into
account. I have neither the space nor the data to execute the relevant
analysis here with anything like a TBLE degree of precision. However, I
am confident that MC is lower than MLC and that Williamson's
first-best-allocative-efficiency analysis underestimates the
allocative-efficiency gain the mergers he is analyzing generate by
reducing the private cost the merged firm incurs to produce its unit
output below the private cost the merger partners would have had to
incur to produce that unit output after the date of the mergers.

The first-best character of Williamson's analysis--i.e., the
fact that it assumes that the relevant economy contains no Pareto
imperfection other than the imperfection in seller price-competition the
mergers at issue create--also undercuts his investigation of the second
economic-efficiency issue he addresses--the economic-efficiency
consequences of the reduction in the unit output of the good that the
merger partners and the merged firm produce that he stipulates the
mergers in question would cause. Williamson claims that this reduction
in unit output will cause economic inefficiency equal to the area
between the industry demand curve for the product in question and the MC
curve for that good that would be operative after the date of the
mergers if no mergers were executed between the good's higher
no-merger output and its lower post-merger output. Once more, this
conclusion would be correct if the relevant economy were
otherwise-Pareto-perfect since in that case the industry demand curve
for the good (DD) would coincide with the marginal allocative value
curve for the good (MLV) (the curve that indicates the allocative value
of successive units of the good) (120) and the no-merger MC curve for
the good would coincide with the no-merger MLC curve for the good.
However, in our actual, highly-Pareto-imperfect economy, the other
Pareto imperfections the economy contains may well cause MLV to depart
from DD and MLC to depart from MC. Thus, as we just saw, even if I
ignore the possible divergence of MLV from DD, if the units of the good
the merger partners produced that would not be produced by the merged
firm would be produced with resources withdrawn from the production of
other goods by non-discriminating imperfect competitors that face
downward-sloping demand curves, MLC will be higher than MC (if no other
Pareto imperfections critically affect this relationship).

Admittedly, the actual relationship between MLC and MC will depend
on the percentages of the resources that would have been devoted to the
production of the units of output that the merged firm would not produce
that the merger partners would have produced after the date of the
mergers that would have been withdrawn respectively from alternative
unit-output-increasing, QV-creating, and PPR-executing uses and the
percentage-distortions in the private benefits those resources would
have generated in their alternative uses to their alternative users,
which percentages will depend on the incidence and magnitudes of a large
variety of Pareto imperfections. Once more, I have neither the space nor
the data to execute the relevant analysis with anything like the TBLE
degree of precision. Nevertheless, I will again state that I am
confident that the relevant MLC curve is higher than the MC curve that
Williamson assumes coincides with it. If MLC is higher than MC,
Williamson will have overestimated the amount of economic inefficiency
that the category of mergers he is examining will generate by reducing
the unit output of the good the merger partners produce. Indeed, if MLC
is sufficiently above MC, the reduction in unit output may actually
increase economic efficiency. Put crudely, if the good in question (say,
X) is produced with resources withdrawn exclusively from the production
of units of other goods (say, Z1 ... n) and neither the good in question
nor the other goods has any complements, the merger-induced increase in
the price of X (in [P.sub.x]) will increase/decrease economic efficiency
if it decreases/increases the difference between
([P.sup.*.sub.x]/[MC.sup.*.sub.x]) and weighted average ([P.sup.*.sub.z1
... n]/[MC.sup.*.sub.z1 ... n]) where the asterisks over the P figures
indicate that they have been adjusted to make each [P.sup.*] figure
equal the associated marginal allocative value figure and the asterisks
over the MC figures indicate that they have been adjusted to make
[MC.sup.*.sub.x]/[MC.sup.*.sub.Z1 ... n] (where the weights assigned to
the respective members of the set of products Z1 ... n are proportionate
to the allocative value of the unit[s] of each product in that set that
would be sacrificed to produce the marginal unit of X) equal the rate at
which the relevant economy can transform the relevant bundle of Z1 ... n
into X. (Not to worry!)

But I should not bog you down with too much detail. The important
point is that, if I am right that [MLC.sub.x] exceeds [MC.sub.x] in our
actual, highly-Pareto-imperfect economy, Williamson's canonical
analysis will have overestimated the economy-efficiency loss that the
mergers he is analyzing will cause by increasing the price and
decreasing the unit output of the good the merger partners produce at
the same time that it underestimates the economic-efficiency gain the
mergers will yield by generating private production-efficiencies that
have allocative counterparts. If the mergers in question and any
antitrust policy one could adopt in relation to them had no other
economic-efficiency consequences, an analyst that used my
distortion-analysis protocol rather than Williamson's first-best
approach to analyze the economic efficiency of the mergers in
Williamson's category would conclude that such mergers were
systematically more economically efficient than Williamson's
analysis concluded. To the extent that the differences in question were
critical--i.e., to the extent that analysts who used my approach would
find economically efficient mergers that Williamson would find
economically inefficient and/or (if my more specific conclusions are
wrong) that analysts who used my approach would find economically
inefficient mergers that Williamson would find economically efficient,
the substitution of my approach for Williamson's would increase
economic efficiency (if actual policy-choices were determined by their
economic efficiency and analysts who used my approach took appropriate
account of the allocative cost of the research they did).

So far, I have focused on the two categories of economic-efficiency
impacts that Williamson's canonical analysis does consider.
However, the distortion-analysis protocol would also address a number of
other possibilities that Williamson ignores. I will now address four
such additional possibilities.

Williamson's failure to consider the first two of these
possible consequences probably reflects nothing more than the
page-constraints that economics journals place on authors and
Williamson's correct judgment that, across all cases, these issues
are less important that the ones he analyzed. First, the
distortion-analysis protocol would consider the transaction costs that
the mergers Williamson scrutinized would generate and the
transaction-cost consequences of any government responses to them.
Perhaps more notably, the distortion-analysis protocol would take
account not only of the referenced private transaction costs but also of
the fact that various Pareto imperfections would distort those private
transaction costs--would cause them to diverge from their allocative
counterparts. Since all other economists fail to consider the possible
difference between private and allocative transaction costs and no such
differences would arise on Williamson's otherwise-Pareto-perfect
assumptions, it seems fair to conclude that, had Williamson addressed
transaction-cost issues, he would have equated private with allocative
transaction costs.

Second, the distortion-analysis protocol would consider the fiscal
impacts of the mergers Williamson analyzed (e.g., their impacts on
business profits and the taxes paid by businesses) and the fiscal
impacts of the various responses government could make to them and,
derivatively, the impacts that these mergers and any responses
government made to them would have on the amount of resource
misallocation government generates when financing its operations.
Although Williamson's failure to consider these issues probably
reflects the page-constraints he faced and a defensible set of
priorities, it is worth noting that economists never address these
issues--do not do so even when they are writing book-length
economic-efficiency analyses whose lengths are not critically relevantly
affected by page-constraints.

Williamson's failure to address the next two sets of possible
economic-efficiency consequences of the mergers he analyzed that the
distortion-analysis protocol would investigate is more troubling because
economists in general fail to consider the impact of choices on these
categories of economic inefficiency. The first set of such consequences
is QV-investment related. Williamson is assuming that the product
produced by the merger partners and merged firm is a homogeneous product
whose attributes would not in any circumstances be altered. I think
there are virtually no such products: even when no-one will ever find it
profitable to alter the physical attributes of a product--i.e., to
introduce a product variant with somewhat different physical attributes
or to differentiate the image of a product with given physical
attributes, the total attributes of a product include its average speed
of delivery in all cases in which the demand for it fluctuates through
time, and firms can increase the quality of their total product by
making a QV investment in capacity or inventory that increases the
average speed with which they can supply customers with units of their
physical product throughout a fluctuating-demand cycle. Williamson
ignores this reality--specifically, ignores the impact that the mergers
he is considering will have on the equilibrium quantity of QV investment
(on the equilibrium amounts of capacity and inventory) in the relevant
area of product-space. In the one direction, Williamson's mergers
will tend to increase equilibrium QV investment in the relevant ARDEPPS
by raising the prices that will be charged for "the relevant
product" at different ARDEPPS QV-investment quantities and hence
the supernormal rate-of-return that all QV investments in that area of
product-space will generate at any ARDEPPS QV-investment quantity and
may increase equilibrium QV investment in that ARDEPPS by generating
dynamic efficiencies. In the other direction, if the barriers to entry
facing the best-placed potential entrant into the relevant ARDEPPS are
critically higher than the barriers to QV-investment expansion that
would have faced one or more of the merger partners and/or if
Williamson's mergers would replace merger partners that would have
faced no monopolistic QV-investment disincentives with a merged firm
that faces substantial monopolistic QV-investment disincentives,
Williamson's mergers would tend to reduce equilibrium QV investment
in the relevant ARDEPPS on these accounts. The distortion-analysis
protocol would instruct the analyst to estimate/guesstimate the impact
of Williamson's mergers on equilibrium QV investment in the
relevant area of product-space and then to investigate the impact of any
change in equilibrium QV investment in that ARDEPPS on interARDEPPS
QV-to-QV, UO-to-QV or QV-to-UO, and PPR-to-QV or QV-to-PPR resource
misallocation.

The second member of this second set of possibilities that
Williamson (like economists in general) ignores but that the
distortion-analysis protocol would take into account are all
PPR-related. Thus, the distortion-analysis protocol would consider the
possibility that Williamson's mergers might deter
economically-efficient PPR that aimed to discover a
less-accident-and-pollution-loss-prone production process if, for
example, the merger partners and the merged firm were liable in tort
only for the consequences of their negligence, their failure to do PPR
was never assessed for negligence, and no independent research firm
could profitably execute the relevant PPR. The distortion-analysis
protocol would also instruct the economic-efficiency analyst to
investigate (1) the impact that the merger in question would have on the
amount of PPR done to discover lower-marginal-cost production processes
(by causing the pre-discovery unit output of the merged firm to be lower
than the pre-discovery outputs that the merger partners would have
"collectively" produced after the date of the merger and
thereby [A] lowering the private cost-saving such a discovery would
enable the merged company to obtain on its pre-discovery output below
the benefits such a discovery would have yielded any merger partner that
made it after the date of the discovery by lowering that merger
partner's total variable costs on its pre-discovery output and
putting it in a position to make money by licensing rivals to use its
discovery to produce their pre-discovery outputs and [B] causing the
profits such a discovery would enable the merged firm to realize by
expanding its output to differ from the profits the discovery would have
enabled any merger partner that made it to realize by expanding its
output and licensing its rivals to use the discovery to expand their
outputs). The distortion-analysis protocol would also instruct the
economic-efficiency analyst to estimate/guesstimate the dynamic
PPR-related efficiencies the mergers would generate and the impact that
any such efficiencies would have on economic efficiency (1) by creating
a merged firm that executes more-allocatively-valuable PPR projects than
the merger partners would have executed with the resources (measured by
their allocative cost) that they would have devoted to PPR after the
date of the mergers and (2) by increasing or decreasing economic
efficiency (inter-ARDEPPS PPR-to-PPR misallocation, QV-to-PPR or
PPR-to-QV misallocation, and/or UO-to-PPR or PPR-to-UO misallocation) by
creating a merged firm that devotes a different amount of resources
(measured by their allocative cost) to PPR than the merger partners
would have devoted to PPR after the date of the mergers. Finally, the
distortion-analysis protocol would also instruct the economic-efficiency
analyst to consider the possibilities that Williamson's mergers (1)
might increase economic efficiency by creating a merged firm that
executes less-economically-inefficiently-duplicative PPR projects than
the merger partners would have executed with the resources that the
merger partners would have devoted to PPR after the date of the mergers
and (2) might either increase or decrease economic inefficiency by
creating a merger firm whose ability to execute less-duplicative PPR
projects than the merged firms would have executed after the date of the
mergers makes it profitable for it to devote more resources to PPR than
the merger partners would have found profitable to devote to PPR after
the date of the mergers.

Because the distortion-analysis protocol would take into account
many economic-efficiency-relevant impacts of the mergers Williamson
studied that Williamson's analysis ignores, its assessment of the
economic efficiency of these mergers will be more accurate than a
Williamson analysis would be. Once more, to the extent that the
distortion-analysis protocol correctly assesses mergers in
Williamson's category to be economically efficient or economically
inefficient when Williamson's analysis would have generated the
opposite conclusion, the substitution of the distortion-analysis
protocol for Williamson's analysis will increase economic
efficiency if policy-decisions are determined by their economic
efficiency and the distortion-analysis analyst takes
economically-efficient account of the allocative cost of any analysis he
or she executes.

This "coda" has delineated and made some effort to
justify the distortion-analysis protocol that the antitrust-policy
sequel to the antitrust-law books on which this special issue focuses
uses to analyze the economic efficiency of antitrust-policy-covered
business conduct and various antitrust policies. I have included this
material for two reasons: (1) to make absolutely clear the difference
between antitrust-policy analysis and the analysis of the legality of
business conduct under U.S. or E.U. antitrust law and (2) to pique
readers' interest in the antitrust-policy sequel and the
Distortion-Analysis Protocol book I intend to publish before the
policy-sequel to explain and justify the distortion-analysis protocol
the antitrust-policy sequel will use to assess the economic efficiency
of antitrust-policy-covered business conduct and various antitrust
policies.

DOI: 10.1177/0003603X15625126

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with
respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research,
authorship, and/or publication of this article.

(1.) The two volumes of Economics and the Interpretation and
Application of U.S. and E.U. Antitrust Law were published by Springer in
2014. The subtitle of Vol. I is Basic Concepts and Economics-Based Legal
Analyses of Oligopolistic and Predatory Conduct. Vol. I will be cited
hereinafter as Markovits, Economics of Antitrust Law 1. The subtitle of
Vol. II is Economics-Based Legal Analyses of Mergers, Vertical
Practices, and Joint Ventures. It will be cited hereinafter as
Markovits, Economics of Antitrust Law II.

(2.) This policy-study will also be published by Springer,
hopefully in 2017.

(4.) Natural oligopolistic conduct is conduct whose ex ante
perpetrator-perceived profitability was critically affected by the
perpetrator's belief that its rivals' responses would or might
be influenced by their belief that it would have the opportunity to
react to their responses and would find it inherently profitable to
react to any undercutting or undermining response that they would
otherwise find profitable in one or more ways that would render those
responses unprofitable for them. The law-study uses the expression
"undercutting response" to refer to a response to an
individualized oligopolistic price that would render it unprofitable and
the expression "undermining response" to refer to a response
to an across-the-board oligopolistic price that would render it
unprofitable. For the referents of "individualized price" and
"across-the-board price," see Part 3C infra. The Sherman Act
does not cover natural oligopolistic conduct because such conduct
involves neither the making of an anticompetitive agreement nor the
making and carrying out of an anticompetitive threat or promise. My
contestable conclusion that the Sherman Act also does not cover any
unsuccessful attempt to enter into an anticompetitive agreement (an
agreement in restraint of trade) reflects three facts: (1) the section
of the Sherman Act (Section 1) that prohibits agreements in restraint of
trade does not explicitly prohibit unsuccessful attempts to form
agreements in restraint of trade; (2) the laws of the U.S. central
government do not contain a general attempt statute (i.e., a statute
that declares illegal any unsuccessful attempt to commit an act that
would be illegal if successfully completed); and (3) the U.S. courts
have consistently refused to read attempt provisions into statutes that
do not contain them. I think that these facts imply that it would be
incorrect as a matter of law for U.S. courts either to read an attempt
provision into Section 1 or to classify an unsuccessful attempt to enter
into an anticompetitive agreement to be an "attempt to
monopolize" (which is prohibited by Section 2). I should add that,
for constitutional reasons, the Sherman Act should be given a so-called
"saving construction" under which it would also be deemed not
to cover any attempt (whether successful or not) by an individual actor
to secure a legislative, administrative, or judicial decision that would
reduce the absolute attractiveness of the best offer(s) against which it
would have to compete in some way that would reduce economic efficiency
in an otherwise-Pareto-perfect economy (see n.10 infra) or any agreement
by two or more actors to cooperate in securing such a government
decision so long as the conduct in question did not violate an
appropriate criterion of fair play.

(6.) The Clayton Act defines "price discrimination" to be
the requisitely-contemporaneous charging of different prices for the
same commodity to different buyers. In the Clayton Act's
terminology, a seller's charging different prices to different
buyers is still called "price discrimination" when the
differences in prices reflect differences in the marginal (or
incremental) costs the relevant seller must incur to supply the buyers
in question. According to the (superior) standard economics definition,
pricing that the Clayton Act would denominate "cost-justified price
discrimination" is not price discrimination at all. On the standard
economics definition, a seller would also be said to have practiced
price discrimination if it charged different buyers the same price
despite the fact that it had to incur different marginal (or
incremental) costs to supply them. On the Clayton Act's definition,
the latter seller's pricing would not involve "price
discrimination."

(9.) Treaty of Lisbon Amending the Treaty on European Union and the
Treaty Establishing the European Community (hereinafter 2009 Treaty of
Lisbon) at Article 101, 2007 OJ C306 p.1 (December 13, 2007)
(hereinafter Article 101).

(10.) An actor's conduct is predatory if its
perpetrator's ex ante belief in the conduct's ex ante
profitability was critically affected by the perpetrator's belief
that it would or might increase its profits by reducing the absolute
attractiveness of the best offers against which it would have to compete
by driving an extant rival out, inducing an extant rival to relocate its
existing investments further away in product-space from the
perpetrator's investments, and/or deterring an entry or an
established-firm investment-expansion or inducing the maker of such an
additional investment to locate it further away in product-space from
the predator's investments when these increases in profits would
render the relevant conduct profitable though economically inefficient
(see Part 2A of this Article) in an otherwise-Pareto-perfect economy. An
economy is said to be Pareto-perfect if it contains no condition that
would generate any economic inefficiency in an otherwise-Pareto-perfect
economy--viz., no imperfection in seller competition, no imperfection in
buyer competition, no externality, no tax on the margin of income, no
critical imperfection in the information available to a resource
allocator (no resource-allocator nonsovereignty), no failure of a
resource allocator to maximize, and no critical buyer surplus.

(11.) A seller initiates a contrived-oligopolistic-pricing sequence
if it charges a price that is higher than the price it would otherwise
find ex ante profitable to charge because it believes that its rivals
will or may be deterred from making otherwise-profitable undercutting
(or undermining) responses to its offer by their belief that it may or
will react to such responses in one or more ways that would render such
responses unprofitable despite the inherent unprofitability of its doing
so--a belief that the firm has created by threatening to retaliate
against their undercutting and or to reciprocate to their abstention
from undercutting.

(12.) See Markovits, Economics of Antitrust Law I at 117-121.

(13.) 2009 Treaty of Lisbon at Article 102 (hereinafter Article
102).

(14.) Council Regulation 139/2004 on the Control of Concentrations
Between Undertakings, OJ L241 (May 1,2004) (hereinafter EMCR). The
original EMCR was promulgated as Council Regulation 4064/89 on the New
Control of Concentrations Between Undertakings, OJ L395/1 (1989).

(15.) I need to explain why I believe that the
specific-anticompetitive-intent operationalization of (1) the
"object" of "preventing or restricting competition,"
(2) an "exclusionary abuse" of a dominant position, (3)
"a restraint of trade," and (4) "monopolizing" or
"attempting to monopolize" is correct as a matter of law. I
think that a relatively-straightforward textual argument justifies
interpreting the Article 101(1) prohibition of covered categories of
conduct that "have as their object.. .the prevention ... [or]
restriction of competition" to promulgate a
specific-anticompetitive-intent test of illegality. For a discussion of
why in this context "object" should be interpreted to refer to
"critical object" as opposed to "an object," see
Markovits, Economics of Antitrust Law I at 117-120. 1 also think that my
reading of the object-branch of the Article 101(1) test of illegality is
favored by the fact that the drafters of this provision were aware of
the Sherman Act's test of illegality (even if they could not have
articulated it in the way in which I have) and the associated likelihood
that they intended the object-branch of their test to replicate the
Sherman Act's test. (For the same reason, I believe that the
effect-branch of Article 101(l)'s test of [prima facie] illegality
should be read to replicate the Clayton Act's lessening-competition
test of prima facie illegality.) In my judgment, the conclusion that an
"exclusionary abuse" of a dominant position refers to conduct
by a dominant firm that violates the specific-anticompetitive-intent
test of illegality is justified by the facts that (1) U.S. courts
implicitly defined the concept of "exclusionary" conduct in
this way before the passage of the Treaty of Rome, (2) the drafters and
ratifiers of what is now Article 102 were well aware of this usage, and
(3) this operationalization is consistent with the pejorative
connotation of "exclusionary abuse." For further explanation,
see id. at 131 and 134-139.1 wish 1 could make a textual or
contemporaneous-usage argument for interpreting "agreements in
restraint of trade," "monopolization," and "attempts
to monopolize" to refer to covered conduct that violates the
specific-anticompetitive-intent test of illegality. However, although
some U.S. common-law cases in the second half of the nineteenth century
seem to have used these terms and their cognates in ways that are
consistent with my specific-anticompetitive-intent operationalization of
them, the facts and opinions of these cases are too obscure for these
opinions to justify my operationalization, particularly given the
nonconforming and inconsistent ways in which this language was used in
earlier U.S. and English cases. See Robert H. Bork, The Rule of Reason
and the Per Se Concept: Price Fixing and Market Division, 74 Yale L. J.
775 at 783-785; Donald Dewey, The Common-Law Background of Antitrust
Policy, 41 Va. L. Rev. 759 (1955); and William L. Letwin, The English
Common Law Concerning Monopolies, 21 Univ. Chi. L. Rev. 355(1954).
However, I do think that my conclusion that the Sherman Act promulgates
a specific-anticompetitive-intent test of illegality is warranted by
three facts: (1) the legislators who drafted and passed the Sherman Act
did so in response to what they perceived to be horizontal price-fixing,
predatory conduct, and horizontal mergers and acquisitions that
manifested their perpetrator's or perpetrators' specific
anticompetitive intent (though, of course, the relevant legislators did
not use this language and probably could not have articulated this
objection to the conduct in question); (2) contemporaneous discussions
at the time of the passage of the Sherman Act manifest the fact that the
Act was perceived to condemn conduct that manifested its
perpetrator's or perpetrators' bad character; and (3) the fact
that the Sherman Act made violations of its terms a criminal offense
manifests the fact that it prohibited conduct that was deemed to be
immoral (conduct that was deemed to be immoral for the reason my
operationalization of the Act's tests of illegality articulates).
It is not by chance that contemporary lawyers continue to claim that the
Sherman Act is about "character," "malicious
intent," and "bad guys." See Timothy J. Brennan, Ahead of
His Time: The Singular Contributions of Richard Markovits, Antitrust
Bull. (2016) at the paragraphs that respectively immediately precede the
paragraph that contains n.45 and the paragraph that contains n.45.

(17.) For a detailed discussion of these issues, see Richard S.
Markovits, Truth or Economics: On the Definition, Prediction, and
Relevance of Economic Efficiency 29-31 (2008).

(18.) Id. at 22.

(19.) See Markovits, Economics of Antitrust Law 1 at 165-181.

(20.) Id. at 249-299.

(21.) See id. at 20-26.

(22.) See id. at 26-39.

(23.) See id. at 43-49.

(24.) For a complete analysis, see id. at 49-68.

(25.) See id. at 345-348.

(26.) Id. at 349-351.

(27.) Id. at 352-367.

(28.) Id. at 367-387.

(29.) Id. at 387-414.

(30.) Id at 434-438.

(31.) See Markovits, Economics and Antitrust Law II at 118-120 for
a discussion of the position that the Department of Justice and Federal
Trade Commission 1992 Horizontal Merger Guidelines (hereinafter 1992
Horizontal Merger Guidelines) take on this issue at Section 2.12, last
paragraph, 4 Trade Reg. Rep. (CCH) Section 13,104 (1992) and Markovits,
Economics of Antitrust Law II at 157 for a discussion of the position
that the Department of Justice and Federal Trade Commission 2010
Horizontal Merger Guidelines (hereinafter 2010 U.S. Horizontal Merger
Guidelines) take on this issue at Section 7.2 (http://
www.justice.gov/atr/publis/guidelines/hmg-2010.pdf) (August 19, 2010).

(32.) See Markovits, Economics and Antitrust Law II at 121-122 for
a discussion of the U.S. 1992 Horizontal Merger Guidelines'
discussion of this issue at Section 2.12 last paragraph of those
Guidelines, and Markovits, Economics of Antitrust Law II at 156-157 for
a discussion of the U.S. 2010 Horizontal Merger Guidelines'
treatment of this issue at Section 2.1.5.

(33.) Markovits, Economics of Antitrust Law I at 503-517.

(34.) Id. at 517-519.

(35.) Id. at 519-530.

(36.) Id at 531-543.

(37.) Id at 543-562.

(38.) Id. at 562-582.

(39.) For a detailed discussion of these objections to
limit-pricing theory and the evidence that its advocates claim supports
it, see Markovits, Economics of Antitrust Law 11 at 221-232.

(40.) For the law-study's analysis of predatory QV
investments, see Markovits, Economics of Antitrust Law I at 582-609.

(42.) For the law-study's analysis of predatory cost-reducing
investments, see Markovits, Economics of Antitrust Law I at 609-611.

(43.) See Markovits, Economics of Antitrust Law II at 40-50.

(44.) Id. at 3-4.

(45.) Id. at 45 and 161-162.

(46.) Id. at 3-4.

(47.) The parenthetical primarily reflects the fact that, by
increasing the merged firm's OCAs and NOMs above those the merger
partners would have enjoyed, horizontal mergers will make contrived
oligopolistic pricing less profitable for the merged firm than it would
have been for the merger partners by increasing the safe profits the
merged firm must put at risk to attempt to contrive oligopolistic
margins above the safe profits the merger partners would have had to put
at risk to do so.

(48.) This conclusion primarily reflects the fact that the merged
firm can use the pricing and advertising of both merger partners'
products to attack a predation target and also reflects the fact that
the merged firm will be able to profit more than either merger partner
could from the tendency of its practice of predation to maintain or
enhance its reputation for engaging in strategic behavior.

(49.) Id. at 5.1 originally published this point in Richard S.
Markovits, Predicting the Competitive Impact of Horizontal Mergers in a
Monopolistically Competitive World: A Non-Market-Oriented Proposal and
Critique of the Market Definition-Market Share-Market Concentration
Approach, 56 Tex. L. Rev. 587, 611 (1978). I repeated it in a
Distinguished Guest Lecture I gave to the U.S. Antitrust Division in the
Spring of 1979. The U.S. antitrust-enforcement authorities (the
Department of Justice [DOJ] and Federal Trade Commission [FTC]) reached
something like the same conclusion in Section 2.21 of their 1992
Horizontal Merger Guidelines, though their articulation of it is
imperfect and their discussions of the sources of both the merger
partners' advantages over each other when they were respectively
best-placed and second-placed and the merger partners' advantages
over the third-placed supplier of a buyer when they were uniquely
equal-best-placed to supply the buyer in question are incomplete and
confusing. See Markovits, Economics and Antitrust Law II at 111.

(56.) See 2010 U.S. Horizontal Merger Guidelines at [section] 1
[paragraph] 8: "Enhancement of market power by buyers, sometimes
called 'monopsony power,' has adverse effects comparable to
enhancement of market power by sellers." See also 1992 U.S.
Horizontal Merger Guidelines at [section] 0.1: "The exercise of
market power by buyers ('monopsony power') has adverse effects
comparable to those associated with the exercise of market power by
sellers."

(57.) See Robert Blair and Jeffrey Harrison, Monopsony (1993).

(58.) See EC Guidelines on the Assessment of Horizontal Mergers at
[paragraph] 90, OJ C3225 (2004).

(59.) See Markovits, Economics of Antitrust Law II at 4-21.

(60.) See Markovits, Economics of Antitrust Law II at 22-35 for a
much fuller account.

(61.) See id. at 50-97.

(62.) See Markovits, Economics of Antitrust Law I at 190-210 and
Markovits, Economics of Antitrust Law II at 94-144.

(73.) See id. at 264-274 for a more detailed analysis that includes
a discussion of the determinants of the ratio of the amount of
transaction surplus a seller will have to destroy to remove a given
amount of buyer surplus from a particular buyer of its product by
raising its per-unit price above its transaction-surplus-maximizing
marginal cost.

(82.) See Markovits, Economics of Antitrust Law II at 276-325
(tie-ins and reciprocity), at 325-339 (resale price maintenance), and at
339-350 (vertical territorial restraints and vertical
customer-allocation clauses).

(83.) Independent distributors do not have a "liberty
interest" in making the choices these vertical practices prohibit
them from making in the sense in which "liberty" is an
important value in the U.S. and E.U. (we have liberty interests
properly-so-called in making choices that contribute to the
chooser's discovering the conception of the good to which he or she
subscribes, that actualize his or her particular conception of the good,
or that fulfill his or her moral obligations); the independent
distributors have accepted the relevant restrictions on their
opportunity-set under conditions that preclude the conclusion that their
wills were overborne; and laws that prohibit sellers from engaging in
these vertical practices are not likely in any case to expand the
opportunity-set of the individuals who--absent those laws--would be
independent distributors: manufacturers will be likely to respond to
such prohibitions by vertically integrating forward into distribution,
by changing their pricing technique (to one that involves higher
per-unit prices and lower lump-sum [franchise] fees) to reduce the
losses that these practices' prohibition would otherwise impose on
them, etc. See id. at 449-450. For a thorough analysis of the concept of
liberty, see Richard S. Markovits, Matters of Principle: Legitimate
Legal Argument and Constitutional Interpretation 278-285 (1998).

(88.) For a summary of many of the individual sets of points about
foreclosure that the following text will make, see id. at 642-645.

(89.) See id. at 344-346.

(90.) See id. at 350 and Markovits, Economics of Antitrust Law I at
642.

(91.) See id. and Markovits, Economics of Antirust Law II at
320-325.

(92.) See id. at 481-482. See also id. at 264-274, 485, and 501.

(93.) See id. at 476-483 for a list of the functions that vertical
mergers can perform that contains a large number of Sherman-Act-licit
functions.

(94.) See id. at 644-645.

(95.) See Markovits, Economics of Antitrust Law I at 643-644. I
want to add one somewhat-related point that will certainly be contested
and may well be contestable. In cases in which it is in the joint
interest of the relevant buyers and the relevant established firms for
enough buyers to lock themselves into the established sellers to deter
new entry, I would conclude that the arrangements that lock the buyers
in do not violate the specific-anticompetitive-intent test of illegality
because they would be economically efficient in an
otherwise-Pareto-perfect economy.

(96.) See Standard Oil Co. v. United States (Standard Stations),
337 U.S. 293 (1949) and Markovits, Economics of Antitrust Law I at
677-678.

(97.) See Tampa Electric Co. v. National Coal Co., 365 U.S. 320
(1961) and Markovits, Economics of Antitrust Law I at 676-677.

(98.) See id. at 673-676. The Supreme Court created the
"essential facilities" doctrine in United States v. Terminal
Railroad Association of St. Louis, 224 U.S. 383 (1912). The Supreme
Court stated that the essential facilities doctrine was crafted by the
lower courts and that it had "never recognized" that doctrine
in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP,
540 U.S. 398, 441 (2004).

(104.) See Markovits, Economics of Antitrust Law I at 693, citing
Delimitis, C-234/89, ECR 1-935 (1991).

(105.) See Markovits, Economics of Antitrust Law II at 448, citing
Communication From the Commission--Guidance on the Commission's
Enforcement Priorities in Applying Article 82 [now-Article 102] of the
Treaty to Abusive Exclusionary Conduct by Dominant Undertakings at
[paragraph] 20 inset four, 2009/C 45/02 (2009).

(106.) See Markovits, Economics of Antitrust Law II at 521 -524,
citing EC Guidelines on the Assessment of Non- Horizontal Mergers Under
the Council Regulation on the Control of Concentrations Between
Undertakings at points 25, 39,49, 64, 67, 73, and 76, 2008C 265/07
(2008).

(118.) See R.G. Lipsey & Kelvin Lancaster, The General Theory
of Second Best, 24 Rev. Econ. Stud. 11 (1956) for the first formal
statement of the theory.

(119.) See Oliver Williamson, Economies us an Antitrust Defense
Revisited, 125 U. PA. L. Rev. 699 (1997) and Economies as an Antitrust
Defense: The Welfare Trade-Off 58 Am. Econ. Rev. 18 (1968). 1 should
note that the trade-off Williamson is referencing is actually an
economic-efficiency trade-off, not a "welfare" trade-off. Even
if, ad arguendo, one equates welfare with utility, choices that increase
economic efficiency will not increase welfare (i.e., utility) if the
utility-value of the average dollar won by their beneficiaries is
sufficiently below the utility-value of the average dollar lost by their
victims. This conflation of "welfare" with "economic
efficiency" is also manifest in the name of the field of economics
that is concerned with economic efficiency--Welfare Economics.

(120.) For simplicity, the text ignores the fact that
price-reductions can affect the marginal allocative value of
intra-marginal units of a good by having distributive effects that alter
the dollar value of intra-marginal units to their consumers.